I spoke with Darren Westlake, CEO of Crowdcube about their experience of the first 18 months of raising funds for equity stakes via crowdfunding.
Our conversation revealed much about what works and what doesn’t work in the world of equity crowdfunding and what the future holds for both business angel investors and the entrepreneurs.
Why did you set up Crowdcube
“I completed two exits and know that the UK has lots of ideas – creative and innovative ideas – but not enough ideas become successful businesses.
“I believe that many ideas are stifled by lack of access to money and I wanted to do something about that.”
What has been happening in the Crowdfunding market?
“My impression of the USA is that crowdfunding websites such as Kickstarter have delivered funds of something like US$400m for more than 25,000 projects and 2 million people who have funded projects.
“The UK is leading the way in equity crowdfunding – whereas in the US they don’t yet have any equity funding crowdfunding platform.”
How has Crowdcube done in its first 18 months?
“We were the first in the world to launch an equity based crowdfunding platform in Feb 2011.
“We have connected £4.2m of investment money with 31 businesses.
“We’ve built an investor base of 25,000 of which around 5,000 have invested money.
“3 investors have invested more than £100k
“We also used our platform to raise £320k for Crowdcube in Dec 2011.”
How does crowdfunding work on Crowdcube?
“Businesses pitch for a fixed amount of money for a set amount of shares.
“This can be for A shares (with voting rights and pre-emption rights) or B shares (no voting right).
“If the company raises the full amount then the investors are committed to providing funds.
“If the company falls short of the target then all the money goes back to the investors.
“Its all or nothing.
“On Crowdcube, businesses pitches are live for up to 60 days during which time they have to raise the amount after which the pitch is closed.”
What does Crowdcube offer startups and businesses?
“Crowdcube allows a business to reach national and international business angels (with UK bank accounts) and not be restricted to just a local region.
“Crowdcube take 5% of the money raised as fees – nothing is paid up front to pitch.
“Crowdcube business angels are doing it for
– financial return
– the security of a portfolio with less risk because you can have smaller investments spread over more investment opportunities
– because it is easy”
Does Crowdcube allow any business or startup to pitch?
“We vet businesses to ensure they have complete plans and forecasts and all companies must produce a promotional video for investors.”
What makes a successful crowdfunding pitch on CrowdCube?
“A great business idea and a great team offers equity holders a great potential return on equity. This appeal is what gets business angels investing.
“Crowdfunding works well for businesses that have lots of potential customers as it can help turn these customers into advocates by using crowdfunding and allowing them to become investors – ie. become stakeholders who have a direct interest in the business.
“CrowdFunding also works well because it formalises the way we ask friends and family to invest.
“Our business angels like participation – so, if you are offering stuff you see in the supermarket, like a beer or bread, then your investors will buy and evangelise your product as well as invest.
“For instance, startups can also do well when they offer rewards ala kickstarter model. So, free subscriptions or additional services for investors is a great idea. It adds value to the proposition.
“Critically the business proposition must be easy to understand for the man on street. So not biotech, unless you have a community of biotech specialists who you can bring to the crowdfunding opportunity – and if that specialist community can quickly and easily understand your proposition.
“Lastly, entrepreneurs get great feedback on their business and business plans via the investors Q&A section which is run openly and publicly for all CrowdCube registered business angels. Responding quickly and effectively to questions is important to build investor confidence.”
What new things have you learnt about business angel behaviour in the last 18 months?
“The average investment stake was higher than we initially thought at £1,800 (instead of around £300). This suggests we have relatively sophisticated investors and not just people who want to bang a fiver on a punt.
“Also we seem to be attracting city traders types wouldn’t join a traditional business angel network but will place money online. They like the standardised format of our deals and find it easy to make decisions.
“This finding means that we are potentially opening up the market to a vast increase to new crowdfunding business angels.”
What is the biggest deal you’ve closed so far?
“The biggest deal was raising £1m for Rushmore”
Tell us about one of your biggest successes?
“Escape the City – this company got offers from two VCs, but chose to list on Crowdcube instead because it wanted to reach out to its subscriber base. They raised £0.5m in a week with a follow on for £100k raised in a further two days.
“The founders decided that they preferred the freedom from institutional investors as well as wanting the investor to also be the customer so that they become advocates and evangelists of the business.”
Can overseas business angels invest?
“Yes, if they have a UK bank account.”
Are you regulated by the FSA?
“CrowdCube do not currently perform any regulated activity but we have applied for authorisation with the FSA as we believes this type of finance model should be regulated in the right way.”
What do you require of business angels?
“Only that they have a UK bank account. We operate a light touch policy.
“For instance, other UK equity crowdfunders ask potential business angels to confirm they are a high net worth or a sophisticated investor, we don’t believe that this is true crowdfunding.
“However, because we require that pitching companies adapt their articles of association to a standard format this makes it easier for the business angels to see what they are getting.”
Do you turn away companies looking for finance?
“Yes, we turn away 75% of businesses that approach us because their investment documents are not good enough.”
What is CrowdCube’s Success rate?
“10 to 1 success rate – for every 10 pitches (ie those that we accept and go live on the site), one gets funded.
“However, because we have only been trading for 18 months, we don’t yet have data on the success of the companies that raised funding.”
What due diligence does Crowdcube do on the pitches?
“We check that the pitch is complete but we do not check out the quality of the idea.
“Nor do not check validity of the information with the exception that we check that the companies exists on Companies House (the UK registrar for companies).
“We conduct an ID check on the individuals, but no more.”
What happens if my company is successful in pitching?
“We use lawyers who will transact all share certificates and collect the investment money for a fixed £1,750 one off fee.
“On average, it takes between 3 to 4 weeks lapsed time from the close a deal to when the money appears in the business’s bank account.”
What are the risks of fraud and failure?
“We want to educate investors to expect a high rate of failure and to aim to achieve a few great successes.
“In regard to fraud – we do vet businesses – that they are who they say they are – and 80% of pitching businesses have some sort of a track record.
“On the other hand there are other crowdfunding models which have no criteria on the any projects that are allowed to pitch.
“We believe this is too loose to be effective for equity investors.”
Future developments on Crowdcube?
“We are building an investor relations portal – which allow the business directors to feed back information to the investors – there will be no additional charge for this service.
“We are currently funding 2 deals per month but expect this to rise to 30 deals per month within 3 years.
“In the future, we’d like to create a secondary market where investors can sell their shares to other investors.”