The British Library’s Business & IP Centre is a superb resource for start-ups and established businesses alike. Last night I attended a seminar on Crowdfunding, looking at raising capital from multiple investors as an alternative to traditional routes from a handful of angels or VCs.
Crowd-anything is a hot topic, and there are a myriad of crowd based alternatives to problems and their traditional solutions:
- Lending: Zopa
- Mutual funds: cutefund
- Startup capital: GrowVC
- Contact data: Jigsaw
- Encyclopaedia: Wikipedia
Embracing the crowd model to fund your business seems to make sense. Everyone knows that access to both debt and equity funding is much more difficult now than it was two years ago. Crowdfunding may fill a gap in the market, between seed funding when you are just setting up and growth capital from VCs which you will need to have a well developed product and revenue stream to justify. The sweet spot is probably from a few hundred thousand to a few million. The logic is simple, don’t rely on just a few limited sources for funding, but tap into investors world-wide. Avoid selling your soul to a VC when you can retain more control by having a greater number of smaller investors, and deal with them on your terms, not theirs. One class of share for everyone, no liquidation preference, no double dip, no ratchets and no more one-sided term sheets.
So why is everyone not doing it?
Charles Armstrong, CEO of London-based Trampoline Systems is a trailblazer who found that whilst the rules and regulations are dense and strict there are numerous grey areas, and these grey areas allow room for some innovation. Trampoline is close to raising £1 million in less than a year, so the approach has worked for them. Financial regulations are extremely strict about companies promoting investment opportunities, presumably to protect the individual from a plethora of get-rich-quick schemes which would otherwise appear. (I don’t see why this is so strictly controlled when it’s possible to gamble or borrow your way to massive financial problems).
It is illegal for private companies to promote investment opportunities in public. Trampoline’s solution: set up a website in isolation to promote interest in crowdfunding (but not directly promote Trampoline).
It is illegal for companies to discuss investment opportunities, to anyone who is not a sophisticated investor, high net worth individual or your friend or family. Trampoline’s solution: get people to self-certify they fall into one of these two investor categories on the Trampoline website before they are able to access anything further.
It is illegal for companies to send your business plan to more than 99 individuals. Trampoline’s solution: those people who made it into the restricted area of the website were given some additional information, for example, the minimum investment was £10,000, and they then had to get in touch by email and specifically request the business plan.
To be as fair to all potential investors as possible everyone investing was offered shares at the same price, on the same terms (BVCA approved articles) and given access to the same documents for due diligence (after signing a confidentiality agreement). I love this open and fair approach, but do wonder whether the addition of a lot of extra shareholders on such agreeable terms may limit your funding options for the future, and would turn off VCs.
Another perspective came from David Smuts of Elexu, who is instead incorporating as a public limited company, rather than a private limited company. Elexu aims to raise millions and give equity stakes to far more than the 100 person limit imposed on private companies. It is a myth that PLCs must be listed on an exchange, and the additional governance and legal requirements are only slightly more onerous than for a private limited company. The main drawback is that no matter the size of your PLC you must file full accounts with Companies House, including a profit & loss, not just an abbreviated balance sheet which is sufficient for most small private companies . Despite the extra cost and effort of being a PLC a small number of people choose to incorporate this way for no other reason than the perceived prestige.
The third speaker was Tony Watts of Keystone Law, who terrified and confused the audience with the severe penalties (both civil and criminal) for getting any of this wrong. Anyone looking to crowdfund will need specialist legal advice, and for that reason I’ve chosen not to repeat any of Tony’s specific advice here, I believe in this instance a little knowledge is a dangerous thing. Make sure you find one of the handful of law firms experienced in this and listen to David Smuts advice, “don’t pay your lawyer to learn this stuff at your expense”.
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