In Investment, Opinion, Startup Management

There’s a lot of buzz about crowdfunding,so I thought it was time for an update from a Scottish perspective…

I first blogged on  Crowd Funding Chaos back in 2011.  This time last year I blogged about the emergence of CrowdCube and SEEDRS in CrowdFunding: Any Spare Change?, and more recently I posted a Friday Link to the Crowdfunding Guide from Nesta.  The market has continued to develop fast since then.

Numbers I heard a few months back from Deloitte suggested that worldwide crowdfunding will raise $3Bn in 2013, with $1Bn in the form of Crowd Equity.  The latter number is perhaps optimistic, but the opportunity is clearly substantial.  The main platforms include:

The State of Crowd Equity

CrowdCube and SEEDRS in the UK both have regulatory approval and have raised substantial sums, totalling millions, for their customers. It is worth noting that many of these projects have been far from high-tech, particularly on CrowdCube.

The attitude of governments in general appears to be that crowdfunding should be allowed – with appropriate regulation it is no more harmful than online casinos or bingo.  There have already been failed projects on Kickstarter, and it is only a matter of time before equity crowdfunding sees a major failure or even fraud – it remains to be seen whether the positive attitudes of legislators will survive this.  A regulatory reaction against crowdfunding could be damaging, but the real danger is that it could spill over into much tighter regulation of angel investment activities under EIS and SEIS.

There are general concerns about valuation – many of the valuations look high by conventional metrics, and these valuations are being achieved without anyone carrying out proper “due dilligence” enquiries.  This may be a barrier to crowd funded companies raising further equity later.

A factor for potential fundraisers to be aware of is that “money follows money”.  Anecdotal evidence suggests the most successful campaigns have a good number of sizeable investors early on, suggesting perhaps that the fundraisers already had family, friends and contacts lined up to get things started.  This is much the same psychology as seeding a tip jar or collection tin so it appears that “everyone else is giving so you should too”.

If you’re interested in crowdfunding, I would highly recommend following the Twintangibles Crowdfunding blog – some of the information in this blog is thanks to one of their presentations and they publish a lot of great content.

So far in Scotland…

  • Crowd donation is alive and kicking, through national platforms and through Scottish based Bloom
  • The biggest success I know if is Edinburgh startup RunRev, which  raised £494k on Kickstarter
  • The West of Scotland Loan Fund will now match  moneyraised through crowdfunding subject to it’s normal terms being met
  • No crowd equity has been raised in Scotland 

A New Crowd Equity Platform for Scotland

I met with Jude Cook  this morning from ShareIn.  Launching this Autumn, ShareIn is a new Crowd Equity platform based in Scotland.  The platform is not dissimilar to CrowdCube in its basic concept (investors hold shares directly, not through a nominee structure), and has some really clever new features to help investors and companies alike.  There isn’t a cap on the funds that can be raised, and it  aims to include companies seeking seed funding in preparation for a later Angel or VC round.

This latter point may prove controversial as Angel groups have a number of legitimate concerns about following crowdfunded investment rounds, not least that the sheer number of investors will prove horrendously difficult to manage.  ShareIn has prepared it’s standard legals with MBM Commercial, Scottish experts in Angel and VC deals, and has put in place measures to mitigate these risks.  It remains to be seen whether companies with ShareIn seed investment will succeed in attracting Angel or VC Capital later, but I see no fundamental reason why they shouldn’t.  Many of the difficulties cited by Angels have either been addressed or could be overcome if a credible proposition were on the table.

Unlike CrowdCube which rejects around 75% of applicants, ShareIn will carry out only basic checks on companies wishing to list.  I am slightly worried that all the promising work they have done could be compromised if it is seen as the “platform of last resort” for companies that have failed to raise money elsewhere.

Crowd for Seed

At the moment I think it’s really difficult for early stage tech companies to raise seed rounds of a few £10ks, for example to match a SMART award.  Kelvin Capital has recently been investing at this level, but most of other angel groups are really working with larger deal sizes.  Crowdfunding in general, and ShareIn in particular may represent an opportunity for a company that has both public appeal and a strong proposition to lead the way in transitioning from a crowdfunded seed round to angel funding.  I will be watching with interest, and I’d love to be involved with such a company if the opportunity arises!

Showing 2 comments
  • ShareIn (@sharein)
    Reply

    Hi Ian, thanks for mentioning ShareIn on your blog! Our goal at ShareIn is simple: we won’t stop until we’ve provided the best possible way for early-stage tech businesses to grow successfully using crowdfunding. It’s been our top priority to develop the structure by considering every perspective – including that of the founders and the potential investors – so we’ve thought long and hard about issues like the management of shareholders after investment. We believe that we’re there, combining innovative legal documentation (that will be publicly available post-launch) and the platform structure itself but we absolutely welcome the debate! The key thing is that we make things easier for all parties.

    The comment about the decision not to filter pitches is another important part of the ethos behind the platform. We strongly believe that experts can’t always be relied on to pick winners – particularly in the early-stage market. Everyone has heard the stories about rejections that subsequently went on to become significant successes (Apple, the telephone, internet, The Beatles…!). With the details of each pitch being completely transparent (again, all will become clearer post-launch!), each investor can choose to invest (or not) directly in who or what they believe.

    Thanks again for the mention!

    Jude

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