Is equity crowdfunding preventing startups from raising more capital?
By Clive Fernandes
Originally posted on the Crowdfunding NZ website
CrowdFund Capital Advisors recently released a report which is an interesting read on deal-flow as a result of Equity Crowdfunding. What really got my attention in this report were the following stats.
Within three months of a crowdfunding campaign:
– 28 percent of the companies had closed an angel investor or venture capital round.
– An additional 43 percent were in discussions with institutional investors.
This finding refutes the assumption that Equity Crowdfunding dissuades follow up investment, which could be one of the major negative perceptions that entrepreneurs and startup companies would have had with Equity Crowdfunding. The theory is that a potential Venture Capital firm would be put off from investing in an Equity Crowdfunded startup because of the thousands of existing shareholders it already has. The CCA report has shown this to be untrue and in my opinion the reasons are as follows.
The two models of Equity Crowdfunding
Currently there are two models in the Equity Crowdfunding space,
Crowdcube Model: Each investor is a direct shareholder in the startup. Only the very largest investors are given “A” class voting shares, while the thousands of smaller investors are given non-voting “B” shares.
Seedrs Model: This involves a ‘nominee’ entity being set up for each successful campaign whereby the nominee buys shares on behalf of the people who want to invest. In this case, the legal owner of the shares is the nominee, which itself has thousands of beneficial owners.
In the Crowdcube model, which I do not agree with, each investor owns a very tiny shareholding, a majority of them non-voting, which means they do not really provide any deterrent to the VCs. Of course they also provide no protection to the mum-n-dad investors, but that is a discussion for a whole new article. In the Seedrs model its the single nominee entity that owns shares in the startup. That is akin to having an angel investor group as the existing investor, which is a process and situation that VC’s are already used to.
On the other hand, the advantage for VC’s to invest in an Equity Crowdfunded enterprise is that apart from their own due diligence and research, they now also have a product that has been validated by potential customers of that product. And this is where I see the true value of Equity Crowdfunding.
Equity Crowdfunding does not have to be about the crowd vs VC’s, but about creating a synergy in which all three parties; the Crowd, the Startups and the Venture Capital firms get value out of the process.
It’s still early days for Equity Crowdfunding as compared to the traditional financing routes, and it will be an exciting journey to see where and how this develops.