Crowdfunding news – latest

A brief round up of crowdfunding news…

No Crowdfunding law for UK?

The recent UK taskforce announcement on alternative funding sources suggests that nothing has been decided at UK Government level.

Seedrs raises capital

However, Seedrs.com have recently announced a £1m fund raising success with top London VCs – DFJ Esprit and Luke Johnson’s Digital Prophets.

Kickstarter trouble

Meanwhile, the original crowdfunding model – developed by Kickstarters – is coming under more attack for not declaring its failures .

US Crowdfunding gold rush?

In the US, the recent change in legislation has led of warnings of a goldrush for crowdfunding whilst Indiegogo raised $15m for its crowdfunding platform.

Where is this going?

There is a definite split in crowdfunding strategy away from the ‘let the market decide’ philosophy on one side to a far more regulated structure on the other.

The fact that Seedrs is FSA regulated is important and shows that it believes that existing rules can be used to protect crowdfunding investors.

However, the upshot of this is that Seedrs will take 7.5% of any money raised (this is up from the traditional 5% that business angels networks typically charge) and they take 7.5% of any profit that the angel investors enjoy.

So, ‘quality controlled’ crowdfunding will be expensive – and hence, will it be the place of last resort for businesses that can’t raise money elsewhere and hence, what will the quality of businesses on the platform look like?

It is the quality of the investments – afterall – that are caused problems with Kickstarter – will Seedrs and their like be able to do better?

If you have more crowdfunding stories or comments – please add those below…

 

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  • Two quick responses from the Seedrs camp:

    One is that our 7.5% fee covers much more comprehensive work than what a typical angel network does. We do all the structuring and execution of the investments, whereas deals done through angel networks generally involve external lawyers and all the additional fees that go with that. We also approve each business’s listing as a financial promotion, meaning that we can make it available to a much wider audience (and pool of capital) than an angel network can. And bear in mind that, unlike some angel networks, we do not do pay-to-pitch — an entrepreneur using Seedrs pays nothing unless he or she succeeds in raising capital. So while I understand the desire to make a comparison, it’s not quite as straightforward as just “5% vs 7.5%”.

    The second point is about Kickstarter’s “failures”. The point of a crowdfunding platform is to be an open marketplace through which investors (or donors, in the case of Kickstarter) can make their own decisions about where to allocate there money. Our job in running the platform is not to try to cherry-pick the businesses we happen to like but instead to provide as many investment opportunities as possible and let the crowd decide what’s worth backing and what’s not. If a platform like Kickstarter or Seedrs is working properly, many projects or deals should not succeed in getting funding; if everything is getting funded, then we’re being too prescriptive in who we bring onto the platform. So if you’re looking for Seedrs to have a lower “failure” rate than Kickstarter, don’t hold your breath because that’s not what we’re aiming for.

    Jeff Lynn
    CEO, Seedrs

  • neil_lewis
    Thanks for the clarification Jeff – that’s very helpful – so Seedr’s key benefit to the entrepreneur is that you can reach beyond the pure High Net Worth individuals and match to a wider audience who would then invest in larger numbers but smaller amounts?

    Equally, the large increase in shareholders creates a potential headache for the entrepreneur running the business – so am I right that you are providing a service to handle this too?

    Br
    Neil

    ps. The question of what is a good or bad investment still remains on the table – but I guess you will at least be able to remove fraudulent appeals for cash – as Kickstarter has had trouble with these lately?

  • Very good questions, Neil. To the first one, yes, one of Seedrs’s main benefits is that we provide access to a much wider pool of capital than just the traditional angel community. Equal to that, though, is that we make fundraising (and investing) a more seamless and transparent process, with significantly less time and energy spent by entrepreneurs and investors on the mechanics, legals etc.

    As for the large number of shareholders, you’re absolutely right that it would be huge headache for the startup to have all of them on its books. That’s why we hold the shares as nominee, allowing the entrepreneur to face only one legal shareholder (us) for votes, consents and all those types of matters. We think this creates a great balance for entrepreneurs: they can tap the support and advice of their investor base all they want (and having a few hundred people with a vested interest in helping you succeed can create huge value), but they only deal with us on all the “paperwork” aspects.

    Finally, your point about fraudulent appeals is a vital one, and we address it very seriously through both (1) a comprehensive legal due diligence process to prevent against fraudulent businesses ever receiving funding and (2) a thorough willingness to use civil litigation, and even press criminal charges, if a fraud does occur. In talking about “failures” above, I was referring to deals that fail to get their full funding (which, as I say, is intended to be a normal part of the crowdfunding process). Fraud is a very different kind of failure, and any platform like ours must take a strong approach to its prevention.

    Thanks very much for your interest in what we’re doing. I hope we can keep discussing these issues going forward and that others will feel free to join in as well!

  • neil_lewis
    Thanks Jeff for another helpful reply

    There seem to be 3 levels of failure

    i. failure to raise the money in the first place (ie failure of the proposition)
    ii. business raises money but fails to do anything
    iii. business builds its model but the fails to reach profit or growth

    Clearly, i. solves itself – re: ii. great that you take a tough attitude towards fraud – which should mean that most of your promoted deals end up building and either succeeding or failing for market / business reasons.

    Do I understand it right that you do not attempt to advise either directly or indirectly on the business potential of any deal? Or will you provide some generic ‘good advice’ or hand this off to partners or leave it entirely to the market?

    Br
    Neil

  • I think you’ve got the “hierarchy of failure” exactly right, and your point about failure #2 is precisely how we see it — there will be plenty of failures of course, that’s the nature of risk, but the failures will be due to genuine market reasons rather than malfeasance.

    As for our approach on advising, you’re correct that we take no view (and make no recommendation) on the business potential of any given startup. We adoped this approach for one very simple reason: we don’t think that we are as good at predicting a seed-stage business’s success as are several dozen or hundred people voting with their chequebooks. With later-stage businesses it’s different, because professional analysis of finances and operations becomes more relevant, and that can be great value-add from a VC or active angel. But when picking businesses at the earliest stages, what matters most is a feel for whether the idea makes sense, whether there’s a market that will pay for it (in some form) and whether this is the right team to bring the idea to the market. In making that assessment, we think the crowds will get it right — i.e., pick the businesses most likely to succeed (or avoid failure #3, if you like) — far more often than a small group of professionals.

  • neil_lewis
    That makes sense Jeff – and I agree that the VC techniques are effective once the business has revenue.

    However, for those of us that work in the world of forming businesses – or at the seed stage – I believe that there are ways of assessing seed investments – they are just not the same methods as later stage VCs would use.

    For instance, startup accelerators always insist on a team of at least two people – and our experience is that you can assess that team to see if they are complementary or not using a tool such as the http://www.eteamtool.com

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