20 RULES OF EQUITY CROWDFUNDING

Hear ye hear ye! Startup Stuff hereby declares the 20 rules of Equity Crowdfunding!Scroll reading

You may have noticed lately that there’s a lot of talk about Equity Crowdfunding. The industry is growing fast with increasing numbers of investors seeking to get in on the ground floor of the latest ventures. It presents a huge opportunity to Entrepreneurs to attract investment into their company but to most of us, Crowdfunding is a relatively new concept. Let alone Equity Crowdfunding specifically. So how does one ‘do’ Equity Crowdfunding?

Worry not my Startup brethren! For the past 6 months I’ve been kicking it at Crowdcube, one of the worlds leading Equity Crowdfunding companies, and in that time I have learnt much. I’ve seen success and failure and have been fascinated to understand what makes a good Equity Crowdfunding Campaign. Thankfully for you, I’m not the secretive type. Behold! The 20 rules of Equity Crowdfunding…

 

 

1) Take ownership of your Campaign. If you’re not making this a priority, why should anyone else? I’ve seen a husband and wife Startup out perform a 20 year old company with a team of 25 simply because at every level, they were involved. The way you manage your campaign is a representation of the way you do business and investors like to know that you’re committed at every level. Responding to questions, following up on enquiries and thanking people for their interest. All the basic courtesy’s of commerce need to be an inherent part of your Campaign.

 

2) It’s good to talk.
It's good to talk
Whether it’s praise from a fan, or criticism from a sceptic. Engage, Interact and Connect. Investors of all sizes want to feel comfortable not just with the company, but the people behind it. Make yourself available to the Crowd and be prepared to tell them your story.

 

3) Keep it simple. If you can’t explain the basic premise in a few sentences, it’s too complex.

 


4) Crowdfunding isn’t easy.
hard-work
It takes hard work to launch a successful campaign. Your campaign is a representation of your business and in that sense, you need to be willing to get involved in every aspect of it.

 

5) Be clear about what you need and what you want. Your initial target should be the minimum amount of funding that your company needs to accomplish its goals. The maximum should be the maximum equity that you’re happy to give away.

 

6) Each member of the Crowd deserves your time, you never know where a conversation might lead.

 

7) Be transparent.
Transparent
Crowdfunding is a fundamentally open and public exercise so there shouldn’t be any closed doors. Every company has its pros and cons, be ready to discuss yours in equal measure.

 

8) Think carefully before engaging a Crowdfunding Consultant (yes, they do exist). There’s nothing wrong with getting a little help with your campaign, so long as you don’t forget rule number 1.

 

9) Choose your platform carefully. There are a variety of platforms out there but whoever you deal with, there are a few critical considerations. How big is their user base? What quality of campaigns have they helped to fund in the past? Contact the companies who’ve used them in the past and ask them how their experience was. Also, some Crowdfunding platforms take a stake in some of your future equity raises.

 


10) Share your story.
my-story
Tell the crowd where you’ve come from, why you care about the project and most importantly, why they should care as well. Remember rule number 2.

 


11) ‘Your’ Crowd should rally ‘The’ Crowd.
Crowd
A good Crowdfunding campaign should start with your own network and spread out from there. It’s a common misconception that Crowdfunding campaigns simply go online and hey presto they’re funded. If you don’t have an initial network of your own, then start building one. Friends, Family, Customers, Colleagues (past & present), anyone who can give your campaign the initial traction to make others take note. In some cases, that might be tough to accomplish but remember rule number 4.

 

12) The Crowd can offer more than just money, keep an open mind. I’ve known companies to secure new customers, international partners and even a new board member via their Crowdfunding campaign. Remember rule number 6.

 

13) Avoid Empty Restaurant Syndrome.
Empty-Restaurant
There’s a social/psychological element to Crowdfunding that’s indicative of human nature. When getting involved in something new (and risky), it’s comforting to know that you’re not the only one. No matter how great your campaign, investors will always hesitate to be the first through the door. Thankfully, once a line forms we all want to know what’s at the front of it. The longer the line, the greater the intrigue. If you’re unsure where your line will come from, see rule number 11.

 

14) Keep it real. You can be as positive as you like, so long as you remain realistic. At the same time, don’t be overly conservative. Any investor worth their salt will appreciate that your projections are just that, projections. Just try to keep in mind that if you have a best case scenario and a worst case scenario, the information you present to the Crowd should be somewhere in the middle.

 

15) Show your workings.
Workings
Remember in school, when you were always asked to show your workings even if you weren’t confident of the answer? Well, there’s a really good reason for that. If a prospective investor wants to know how you intend to acquire that many customers per month or how you’re building your financials, you need to be able to show them. Often, there is no right or wrong answer but it’s important to help the Crowd understand your rationale. If you’re worried about what they might think, see rule number 7. Then, see rule number 14.

 

16) Set a realistic Valuation.
Fair Value
There are many methods for calculating a company’s valuation but ultimately there is no single formula to provide a definitive number which is beyond question. Company valuation remains a point of negotiation which combines objective and subjective factors like EBITDA and Brand. Whatever your valuation, remember points number 14 and 15.

 

17) Learn to think like an Investor. The best Entrepreneurs understand their Investors like the best companies understand their Customers. You need to know what kind of information Investors seek and be able to provide it quickly. As the Entrepreneur, you’re privy to an abundance of detail about your company but the Investor doesn’t need to know all of that. Understanding how Investors think will help you you focus on giving them the information they want.

 

18) Take a common sense approach.
Common Sense
Once your campaign gets going you can find yourself getting involved in some pretty complex discussions around topics like company valuation, financial forecasts, exit strategies etc. At all times, try to take a common sense approach to the discussion. If you feel you’re at risk of getting lost in finer detail keep in mind the point of the discussion. What is the impact on the business? How does this influence whether someone might want to invest?

 

19) Be ready to prove your brilliance. Due diligence is an integral part of the investment landscape. Any potential investor you speak to will do their own due diligence on you and your company before they invest. Financial, Legal and Commercial aspects of your company should all be properly verified. Anything from checking your professional credentials to asking for proof of your patent applications. A good Crowdfunding platform will help you to do this, so remember point 9.

 

20) You can’t please everyone. As brilliant as your Campaign might be, there will always be people who don’t buy in. Some may even dislike your idea. Obviously, it’s your job to convert as many people as you can. Whenever someone has a negative reaction to your campaign you should always engage with them to understand and if possible, overcome their hesitations. However, in some cases despite your best efforts you may not be able to make a fan out of everyone. If you’ve laid out your argument as best you can and feel as though there’s nothing more to be said, it’s ok to take an adult approach and agree to hold a difference of opinion.

The Times They Are A Changing

change

Change is a funny thing. Sometimes it takes us forward, sometimes it pulls us back. Sometimes it comes from years of effort and sometimes, it just happens without anyone realising. We recently experienced one of these changes. It pulled us back, forced so many of us into hardship and worst of all, it stole our confidence. I’m talking about the economic crisis. It’s fair to say that things are getting better, though not with the speed or ferocitywith which they got worse. The road to recovery seems slow.

Yet there is another change happening in the UK. A change in the commercial climate, specifically for Crowdfunding. This change could take us forward, give us the chance to create something, to innovate. It could give us back our confidence. But it’s not just about confidence, Entrepreneurs are naturally optimistic. They have to be. It’s about a combination of factors coming together at the right time in the right way to create a thriving Crowdfunding industry in the UK.

Firstly, something that we really take for granted in the UK. Our politicians are (begrudgingly) working together in the national interest. I know, the phrase ‘in the National Interest’ makes me cringe too. Like a radio station playing your favourite song way too often, Cameron & Clegg utterly killed that expression. Cringe factor aside though, it’s true.  I’m not talking about the Conservatives forming a coalition government with the Liberal Democrats. That was a marriage of necessity.

I’m talking about Barry Sheerman (Labour MP, Huddersfield) who chairs the Westminster Crowdfunding Forum. I’m talking about Vince Cable (Liberal Democrat MP, Twickenham) supporting greater access to alternative sources of finance like Crowdfunding. I’m talking about Damian Collins (Conservative MP, Folkestone & Hythe) awarding the 2013 UK Startup Initiative award to Crowdcube, an Equity Crowdfunding platform (and my new employer, we’ll cover that later). I’m talking about genuine cross party political will and if you want to know just how special that is, you only have to look across the pond at Washington DC.

But it’s more than just political will, it’s UK economic policy. Our favourite bogey man, Chancellor of the Exchequer George Osbourne, recently unveiled the UK Budget. As part of the new budget, the Seed Enterprise Investment Scheme (SEIS) was made permanent. SEIS was a trial launched by the Coalition Government which allows individuals to invest up to £150k into any company and in return, they get up to 50% tax relief on their income that year. Well that whopping incentive is now permanent. Also the UK ‘Exceptional Talent Visa’, which historically favoured Science and the Arts, is now extended to world class Technologists. This makes it a tempting move for any Silicon Valley Techies tired of the commute.

What about the regulator? If anyone’s going to stand in the way of progress, surely it’s the bureaucratic regulator. Actually no, not this time. If you remember the Financial Services Authority (FSA), you’ll recall they were pretty much asleep at the wheel while the financial service industry went all Patrick Batemen on us. Their replacement, the Financial Conduct Authority (FCA) could have easily regulated so harshly against any risk as to suffocate Crowdfunding. But they didn’t. They found a compromise between protecting the consumer and allowing Crowdfunding to grow. It’s not perfect, but it’s a well-reasoned first step.

So, let’s summarise. We have cross party political support for Crowdfunding. An economic policy designed to support entrepreneurial investment. A Visa programme updated to attract the right kind of talent we need to build tomorrow’s companies and a seemingly reasonable regulator, able to strike a balance between protecting the people without tying the hands of businesses. All of these changes are coming together to create one of the most favourable Crowdfunding environments in the world.

But you know what I’m most excited about? It’s not just that the changes are happening, it’s that they’re happening here in the UK. A country full of innovative, commercially driven entrepreneurs that’s always punched above its weight. A country that competes to be the Financial Capital of the world.  A country that created the computer, the jet engine, the internet. Combined with the potential for a thriving Crowdfunding industry, I can’t wait to see what we come up with next.

Top 15 UK Incubators & Accelerators

Jonathan Shieber recently wrote an awesome piece in Tech Crunch listing the Top 15 US Accelerators. With data from Tech Crunch and the number crunching power of two University professors, they managed to rank them as either Gold, Silver or Bronze level players.

In honour of that joyous piece of journalistic jelly, here’s an overview of my 15 favourite UK Incubators & Accelerators. To ensure I don’t hurt anyone’s feelings, this isn’t in order of preference.

1) Growth Accelerator

Covering a variety of sectors but focusing on ambitious, high growth businesses, Growth Accelerator aims to support existing businesses with a range of services. Depending on the nature of the businesses their programme can last between 3 and 9 months. They offer Sales and Commercial consultation, team coaching/development and of course, access to finance. They’ve got some great success stories under their belt including The Fabulous Bakin’ Boys, a particular favourite of mine.

2) Oxygen Accelerator

With an impressive list of mentors and a spot of prime real estate in Tech City, Oxygen Accelerator is a well-known part of the UK Accelerator landscape. Oxygen has been around since 2011 which in Startup years makes them a wise old wizard. Focused on Tech Startups, Oxygen run a 13 week programme after which the cohort are introduced to a room full of prospective investors. Oxygen also offer a further 13 weeks of Incubation to help Startups successfully close their investments if needed.

3) Bethnal Green Ventures

OK full disclosure… I’ve got a soft spot for these guys. Most of my family and a lot of my friends have lived in Bethnal Green so I love that there is a cool company in this particular part of London (pronounced ‘Landan’ if you hail from Bethnal Green). BGV focus on tech Startups that tackle the world’s most pressing social and environmental problems on a global scale. It’s an intensive 3 month programme that culminates with pitch day at either Google Campus or NESTA.

4) Kitchenette

If you’re feeling hungry, don’t go to their website. Kitchenette are the UK’s first Kitchen Incubator and their 12 week programme has been serving up scrumptious food Startups since their first cohort graduated in 2013. Kitchenette also do a great job of emphasising the importance of ethical sourcing that benefits the local ecosystem. Each Startup has to sign up to Kitchenette’s ethical charter placing people above profits and ensuring their products are as sustainable as they are scalable.

5) Accelerator Academy

The Accelerator Academy has a penchant for Technology, Media and Telecoms (TMT) and they’ve received praise from the likes of Boris Johnson, Vince Cable, UKTI and the European Commission. While their 12 week programme is delivered part time, Accelerator Academy are pulling serious global talent and are flying the flag for London to become the Digital capital of Europe.

6) Level 39

By their own admission, Level 39 wanted to create an environment which was partly Bank, partly Facebook. That’s kind of like 1980’s David Bowie and Margaret Thatcher having a kid. But it works! Based in London’s Canada Square and opened by Boris Johnson in 2013, Level 39 has arguably the swankiest office of any Accelerator. They focus on Finance, Retail and Future Cities technology attracting some of the world’s most influential technology investors and innovators. Although they host Conferences, Hackathons and have created a networking hub for FinTech, Level 39 also run a 12 week Accelerator programme making Level 39 another convincing advocate for London’s place in Europe’s digital landscape.

7) The Bakery

The Bakery is a pretty unique Accelerator. The Bakery recruits Entrepreneurs with technological innovations applicable to Marketing Communications and helps them polish their idea. Then, instead of investors, The Baker introduces them to larger brands who get to choose the idea they like. If an idea gets chosen, it’s allocated a budget and given the opportunity to work alongside a large digital agency to bring that idea to market. The idea is that the Entrepreneur gets access to large markets through the brand and with a top flight marketing agency doing the execution, it’s a great way to achieve large scale validation.

8) Accelerator

You would be forgiven for thinking this was an Accelerator. Based in London as part of the London Metropolitan University, Accelerator is actually an Incubator. I know, I’m not giving away any points for the name but Accelerator are worth mentioning for melding the UK’s academic and Startup worlds. There are some UK Universities, mostly those with strong business faculties, trying to set up incubators and accelerators. Partly to help their own students take ideas further but also to provide the skills of entrepreneurial students to Startup businesses. Accelerator is probably the best example of how to do this. The National Association of College & University Entrepreneurs (NACUE) was born out of Accelerator and is a great example of how well they do this.

9) Barclays Accelerator

Barclays Accelerator is what happens when the Startup world infiltrates London’s financial ecosystem. Focused on FinTech this little gem takes 10 Startups through its 15 week programme but perhaps the biggest win for Barclays here is that their Accelerator is run in partnership with Tech Stars. David Cohen (Founder & CEO of Tech Stars) is actually one of the mentors on this programme alongside a variety of senior professionals from Barclays and beyond.

10) Entrepreneurial Spark

With so many Incubators and Accelerators huddled around London it’s great to see an outfit like Entrepreneurial Spark AKA ‘ESpark’ based in Scotland. ESpark’s three venues are brilliantly named Hatcheries or Nests where Startups gain access to a collaborative working space, mentorship and the potential for a cash injection. The ESpark programme seems to have some flexibility built into it and they quote up to a whopping 18 months of potential development time. For some that might be too much but it’s great to see a longer gestation period available for those Startups who are a little slow to fly the Nest… see what I did there. :)

11) Ed Tech Incubator

The only Education focused Incubator I’ve seen in Europe. Ed Tech’s first cohort graduated in Feb 2014 and among my favourites has to be Times Table Rockstars. Ed Techs Director, Ian Fordham is also Co-Founder of the UK’s first cross sector education think tank The Education Foundation. There’s a fascinating blend of education, innovation and commercialisation going on here and anyone interested in the education space should definitely take a look.

12) My Incubator

What I like most about My Incubator is their history. Their first co-working space opened in 2009 and they’ve since opened up 5 more stretching from Watford to Bedford. They’re actually a creation of Wenta, which has been supporting Startups and SME’s since 1983! They’re a real grass roots organisation, partnering with local councils and colleges to stimulate technological innovation and entrepreneurial development.

13) Sirius

Named after the brightest star in the night sky, Sirius is part of the UKTI’s Graduate Entrepreneurs Programme. They offer two programmes, which they call ‘Streams’. One for Startup businesses that already exist and another for idea stage projects that haven’t yet taken shape. In both cases however, they have some specific criteria for applicants which make Sirius a fantastic option for recent international graduates. 50% of the Sirius cohort has to be from outside the UK. Also, they only accept graduates who’ve completed their qualifications within the last 3 or 4 years. Successful applicants receive £12k paid out in regular instalments over a 12 month period along with a variety of free perks including mentorship and access to the alumni network. This is a must see for any overseas students looking to join a UK accelerator as you’re also given a Graduate Entrepreneur Visa endorsed by UKTI if you’re accepted to the programme.

14) Ignite 100

Located deep in the heart of a 10,000 square foot technology campus called ‘Campus North’ Ignite is a beacon for Tech Entrepreneurs in the north of England. 2014 is the inaugural year for their Accelerator programme, with Summer, Autumn and Winter terms for prospective candidates to choose from. As well as an Accelerator, Ignite also offers ongoing Incubation within Campus North. Outside of their main hub in Newcastle, Ignite also have operations in New York and London. With their impressive list of mentors there’s a real buzz about these guys and I can’t wait to see what the first Ignite graduates come up with.

15) Innovation Warehouse

Innovation Warehouse is a bit of an anomaly, but the good kind of anomaly. They’ve managed to create what could possibly be described as a co-working space which has elements of Incubators, Accelerators and Angel Networks. I say possibly because I’m hesitant to slap a label on this one. I think the diversity of Innovation Warehouse is a huge attraction. The Founder, Ami Shpiro gives a brilliantly honest insight into how everything came to being. Innovation Warehouse has no hard and fast rule on the equity they seek or the cash they might invest, let alone an official programme schedule. Don’t let the casual framework fool you though, there is some serious talent passing through this space and the network of Mentors and Alumni would add value to any Startup. Innovation Warehouse adds to the diverse mix of options in the London Startup scene and you should definitely check them out.

Crowdfunding Rules!

OK, I may have brought you here under false pretences. Don’t get me wrong, Crowdfunding does rule. Sadly that’s not what this entry is about. The UK’s financial watchdog, the Financial Conduct Authority (FCA) has unveiled new rules governing how Crowdfunding will work in the UK.

If the story of Crowdfunding so far were a Gladiator movie, this is the point when The Emperor extends his hand and the crowd falls silent, waiting to see whether his thumb points up or down…

The FCA regulations come off the back of The Office of Fair Trading (OFT) report on the state of banking services for Small to Medium Sized Enterprises (SME’s) in the UK. In the latest update they’ve highlighted that firstly, there isn’t enough competition in the UK Banking sector and incumbent firms have no incentive to compete by offering SME’s a better deal. Secondly, there remain huge barriers to new players wishing to enter the market. Lastly, there isn’t enough information available to SME’s on alternative sources of finance. Surprised? No, neither was I. But it’s good to have it in black and white.

So has the FCA acted like a benevolent tyrant, enforcing draconian rules that suffocate Crowdfunding? Or have they fallen asleep at the wheel, allowing part of our financial system to run amuck? Well, neither actually.

I’ve seen it reported that this regulation ‘Takes the Crowd out of Crowdfunding’. I’ve also seen claims that it doesn’t go far enough. The truth of the matter is less dramatic than I’d been led to believe. Frankly, for a first stab the FCA haven’t done a terrible job. Certainly there are things they could improve but the most important thing is, they haven’t screwed it up.

Firstly, let’s talk about Debt Crowdfunding. The FCA have made sure that anyone looking to lend money in this way be made aware of the risks. Ultimately, it’s not like putting your money into a savings account so the normal Financial Services Compensation Scheme won’t apply. Debt Crowdfunding platforms must also have back up plans if anything goes wrong. So let’s say you’ve lent money through a Debt Crowdfunding platform. You’re getting paid back with interest and the company in question is putting your loan to great use but then, the platform you’re using goes bust. Well, by new regulations the platform must have a plan in place for someone else to step in and handle the administration of any existing loans.

The FCA have also stated that over time they’ll introduce more regulation ensuring that Debt Crowdfunding platforms hold enough capital of their own to protect against any financial shocks. Basically ensuring that they’re financially strong enough to weather turbulent financial conditions.

So far, so good.

What about Equity Crowdfunding? Well, the FCA has acknowledged that it’s riskier than Debt Crowdfunding. No argument here. So again, the FCA have stipulated that these risks must be made clear to investors. Most, if not all of the Equity Crowdfunding platforms I know already do this, but its good the FCA have made it a requirement. Investing in Startups could earn you a much higher rate of return than any high street or retail investment poduct. However, many Startups can and do fail and when that happens there is very little chance of getting your money back. In order to spread the risk, it’s wise to have multiple smaller investments in a number of Startups rather than putting all your eggs into one basket. The FCA is simply making sure that individuals are made aware of this, before they consider investing.

But here’s the big question, how much can we invest in our beloved Startups? Well if you’ve got some equity investment experience and can prove you know what you’re talking about. Fire away. However, if you’re a first time investor with no investment experience you can dabble with 10% of your assets. I could have phrased that differently, I could have said ‘only 10%’. Because to some, the 10% rule is unfair. The majority of the public won’t have investment experience so this regulation limits most of us to investing under 10% of our assets. At least to begin with.

So why am I not lambasting the FCA for ‘taking the crowd out of Crowdfunding’? Because frankly, they haven’t done that. What the FCA have done is give EVERYONE an opportunity to get involved without putting ANYONE at unnecessary financial risk. It’s called compromise and it’s what any good regulator should do. These rules are only the first of many governing new and uncharted territory in the financial frontier.

Keep in mind that the FCA doesn’t even officially come into existence until April 1st. They’re replacing the old Financial Services Authority (FSA). Remember the FSA? They were the watchdog who let the banks do pretty much whatever they wanted. I believe ‘light handed regulation’ was the polite way of saying it. Well, the FSA was disbanded by the coalition government in the wake of the financial crisis and it’s no surprise that the FCA’s first real attempt at regulation emphasises a degree of caution. But you’ve got to give credit to the FCA here. It would have been all too easy for them to have landed a hammer blow of regulations to prove they’re not going to repeat the mistakes of the FSA, but they haven’t. These are prudent, common sense rules.

I think these regulations represent progress. They allow the UK Crowdfunding industry to move forward, put aside the uncertainty of pending regulation and get on with the business of growing the industry.

And now, for a splash of comedy…

Unknown to most of you, someone else has been watching all of this. Waiting with beady eyes and clammy hands to see what the FCA came up with. From deep in his bunker, Hitler has found out about the FCA’s plans and, spoiler alert, he’s not happy. Click here to see Hitler’s reaction to the FCA Crowdfunding rules.

Crowdfunding 101

So, what’s going down in Startup town?

A lot my friends, a hell of a lot. Let’s start with something I’m massively excited about right now. Crowdfunding…

Crowdfunding is a way of connecting companies and projects that are looking for resources (primarily but not always financial) with groups of individuals like you and me AKA ‘the crowd’. First, let’s take a look at the different types of Crowdfunding.

Equity Crowdfunding - The Crowd invests in a company and get an equity stake (shares) in the company in return. Equity Crowdfunding is a hugely important type of Crowdfunding and I’ll cover it in more detail later. For now let’s just use the example of investing in Facebook or Google when they were just wee little Startups. Gasp!

Donation Crowdfunding - The Crowd invests in something because they believe in the cause. A cool example of this is the Sochi 2014 Winter Olympics. Without funding from their sports federations, many Olympians were unable to fund their trip to Sochi. So they raised the money via Donation Crowdfunding. Canadian Skiier Kim Lamarre was among them and ended up with a Bronze medal.

Debt Crowdfunding - The Crowd lends money to other individuals or businesses. You might hear “the suits” refer to this as P2P (Pier to Pier) lending. For example, you go on-line and browse a list of companies and individuals looking for a loan. You pick the one that you like and you get paid back over an agreed period at an agreed rate of interest.

Reward Crowdfunding - The Crowd invests in a business for a reward. Duh! ;) For example, I saw a film director I love with a proposal for a new film. I loved the idea, so I invested. In return I get to go the premier and I’ll receive a copy of the film, signed by the Director.

Like I said, Equity Crowdfunding is hugely important. It’s important because it changes something fundamental in the way our financial system works. To understand the change, you have to take a little stroll down history lane. Around the turn of the 20th Century in free market economies like the US, more and more individuals began to wield significant financial wealth. People like the Rockefellers, people with the kind of wealth that could help create new Startup companies, provide jobs and fuel growth. Regulators wanted to encourage this kind of investment but on the other hand, they needed to protect citizens from adverse risk and investing in private companies was a risky business.

Around about the 1940’s courts began allowing certain individuals to invest freely in private companies if they were considered an ‘Accredited Investor’. Depending on where in the world you are the definition of Accredited Investor changes slightly, but it largely comes down to your net worth. To help paint a picture of the Accredited Investor let’s take a closer look at some of the main criteria in The US and Europe.

US
- An individual with a minimum net worth of $1 million
– An individual with a minimum annual income of $200,000 (Or $300k between you and your spouse)

EU
- An individual who’s made 40 investments in the last 12 months to a minimum value of €200,000
– An individual with a financial portfolio worth over €500,000

In the UK, that represents roughly 5% of the population. Consider that these benchmarks were laid down in the 80’s and are set to be adjusted upwards to account for inflation and it soon becomes clear the ‘Accredited Investor’ test is more an accreditation of a person’s bank balance than of their ability to invest. Being an Accredited Investor isn’t about your knowledge of investment or education in finance or even the basic information you have available to you. It’s the $ you drop on the desk. It’s the £ you pack into your pocket. It’s the € you yield or how many ¥ you’re worth. It’s money.

Here’s another point to consider, a pretty messed up point if you ask me. Let’s say you’re an Entrepreneur with a great new Startup. You’ve got off the ground thanks to a small but loyal customer base and with the help of some Angel Investors you’ve got most of the money you need for the next stage of growth. But you’ve still got a few shares left to sell and you’d like to offer them to your customers, Joe public, so they can share in the spoils of your success. They’re not ‘Accredited Investors’ but they’ve loved and supported your idea from day one and can’t wait to see it take over the world. Well Mr Entrepreneur, if you pitch your idea to them that’s punishable with jail time. At least, it was in the UK until a few short years ago when the rules were changed.

Basically, when you look back at the relationship between budding Startups and Joe public, there’s kind of a Romeo and Juliet thing going on. We both know the odds of living happily ever after are slim and we know that the laws of the land forbid it, but we don’t care. We’ve got a thing for one another and it’s always felt a little unfair that we can’t explore that relationship.

Well brothers and sisters, Equity Crowdfunding might just be the Knight in shining digital armour that rides in to re-write the rule book.

There are a variety of Equity Crowdfunding platforms in the world right now but the number is growing… fast. A splendid UK example founded in 2010 is Crowdcube. When you reach their website you’ll see a list of projects of all types and sizes who are looking for X amount of investment in return for Y number of shares. Each project will give you the low down on their concept, the team behind it and how with your help, they plan to grow. If you find one you like, you can pledge to support it. The amount you can pledge will vary from one investment to another but it could be as little as £5 or an uncapped amount.

Keep in mind that each project has to raise at least 100% of the funding otherwise it can’t go ahead. Not all projects are successfully funded and if the one you pledged to support fails to reach its funding target by the deadline, the project is simply cancelled and no money changes hands. Assuming the project receives 100% of the required funding pledges by the deadline then congratulations, you’ve just helped to fund a new business! At that point, the money you pledged will be transferred from your account to the project, not before. That’s a really cool feature of Equity Crowdfunding. Your money will only ever go into projects which have succeeded in getting at least 100% of their funding.

For Startups, Equity Crowdfunding is obviously a great way to raise money. Rather than only being able to secure funding from 5% of the population, you’re opening up the other 95%. Each one of the 95% might only invest £100, but there sure are a lot of us! Equity Crowdfunding is also a great way to allow individuals to get involved with exciting Startup companies at the early stages. It opens up a huge new area of personal investment and gives individuals more control over their money by allowing them to invest straight into the projects they care about. But more importantly than that. Perhaps, most importantly of all. Equity Crowdfunding gives us a seat at the table and a share in the game. It gives each of us the chance to help build the companies of tomorrow and improve our lives in the process. That’s something very special. Something I think a lot of people have been crying out for a very long time.

Equity Crowdfunding might just be the best thing to happen to Capitalism since Capitalism. It could help stimulate innovation, create jobs and re-balance the distribution of global capital to better reflect the passions of society. Equity Crowdfunding could diversify the Boards of tomorrow’s companies to better reflect the diversity in the working population. Equity Crowdfunding could even help to bridge the gap between the 1% and the 99% and democratise the financial world in a way never before seen.

You may have noticed, there was a lot of ‘could’ and ‘might’ in that last paragraph. That’s because it’s too early to tell just how revolutionary Equity Crowdfunding may be. Like so many things it has potential but right now, it’s still a very fragile little creature. The way Governments and Regulators react will have a huge impact and much like a Startup, the odds are against it. But when I look at Equity Crowdfunding and Crowdfunding in general, I believe it can make a difference. Crowdfunding gives me hope that the future of commerce isn’t just another slice of history repeated. What I see in Crowdfunding is the potential for something new and better that I can truly get excited about and I think, that’s worth writing about.

The Story of Startup Funding

Startup funding is a vast and mysterious land. Few have ever ventured there and to do so alone, is dangerous. Worry not, for Startup-Stuff shall be your guide! We will pass over Bootstrapping Bridge and into the land of Accelerators and Angel Investors. Together, we will venture through the valley of Venture Capital before climbing the Peaks of Private Equity. Then, we will reach the shores of the Stock Market and the open oceans of the IPO. This is the story of Startup funding.

Our story begins with a women called Julia. One day, Julia has an idea. An idea that stands out amongst all the others as something really worth doing. As Julia begins to work on her idea she realises it’s costing more time and money than expected (it normally does). So Julia approaches James. James is smart, enthusiastic and has the right skills. Julia can’t pay James so instead Julia forms a company and gives James 50% of the Equity. Julia and James, now Co-founders, continue working together using what little time and money they can spare. However they soon realise that in order to keep going, they’re going to need more cash. So they approach their friends and family for some help. Together Julia and James manage to scrape together £10k, buying them a few extra months. Everything that’s happened so far is called The Bootstrapping Stage and makes up the fragile early months of a Startup’s life.

After a few months of Bootstrapping, Julia and James can now see their way to launching a prototype. But to do that they’ll both need to work on it full time. This next round of funding is called The Seed Stage. The Seed Stage involves wealthy individuals who invest in early stage companies in exchange for equity, AKA Angel Investors. An Angel will typically invest anywhere from £50k to £600k. The figure will depend on how much your company is worth. Keep in mind that an Angel normally brings more than just his wallet. A good Angel will also have experience and connections in the space you’re launching into.  If you already know a few Angels and they’re keen to invest, then congrats.

Unfortunately, Julia and James don’t know any Angels. Thankfully, there are organisations which offer a stepping stone into the land of the Angels. Incubators, Accelerators and Excubators will provide mentorship, free working space and a modest cash injection in exchange for a small equity stake in the company (typically around 5-10% equity). As well as helping you ready your prototype, these companies will also connect you with Angel Investors and advise you on how best to pitch to them. Perhaps the most renowned Accelerator is Google’s tech focused ‘Y Combinator’ which attracts swarms of Angel investors. Y Combinator can boast the likes of Paul Graham among the ranks of their mentors and their ‘graduates’ include companies like Airbnb and Dropbox.

At this point in our story, Julia and James have spent three months with an Accelerator in exchange for 10% equity in their company. With the cash and advice from the Accelerators mentors they finished their prototype and impressed the Angels enough to secure £500k of investment in return for 20% equity in their company. 10% remains with the Accelerator and between them, Julia and James own the 70% that’s left.

With the cash and connections from the Angel Investor and their prototype ready, Julia and James launch into their first markets and a loyal customer base begins to grow. To keep up with demand, the Company employs its first staff. As the team begins to buzz and yet more customers flock to try their product, Julia and James pat themselves on the back. Soon however, they face a cold financial reality. With the cost of the new staff and their new office space, they’re burning through cash at a furious rate. Their product is hot news but it needs refinement and the team is stretched to breaking point. The company seems poised to go global but to do that, they need to invest in building a better product and a bigger team. Enter the Venture Capitalists.

Most of us have heard of Venture Capitalists AKA “VC’s”, but what do they actually do? Well, quite simply they invest Capital (money) into Ventures (risky or daring projects). In exchange for investing in riskier projects, VC’s seek higher rates of return. Unlike Angels who invest their own money into a relatively small number of investments, VC’s are small groups of professional investors who invest other people’s money. A Venture Capital company will raise their funds from a combination of Pension Funds, Foundations and High-Net-Worth Individuals (HNWI’s) who are looking to allocate some of their money to slightly higher risk/return investments.

Another difference between Angels and VC’s is the size of their investments. Where Angels play in the region of £50 – £600k, Venture Capital investments range from around £500k right up to several hundred million. Those are intimidating numbers for Julia and James but after taking a serious look at their plans and talking things over with their Angel it soon becomes clear, that’s exactly the kind of investment their company is going to need if it’s going to keep growing.

Luckily for our two Entrepreneurs, their Angel introduces them to some eager VC’s who’ve been following their success and within a few months they’re signing off a £50 million investment in exchange for 30% equity in their company. This first round of Venture Capital investment is called Series A and many companies go on to have Series B and C as more VC’s seek to invest and gain an equity stake in the company.

For a brief moment, I’m going to pause our little story. We’ll return to Julia and James in just a moment but first, I need to mention Crowdfunding. I haven’t mentioned it so far because it’s not yet a ‘typical’ stage of Startup funding. Emphasis on the yet. Crowdfunding is very much the new kid on the block, everyone’s talking about it but the jury’s still out. That’s partly because it hasn’t yet stood the test of time and partly because not everyone understands it. However, some of the most successful Crowdfunding projects have managed to raise tens of millions in just a few months. So, it’s possible that the entire journey Julia and James have taken so far, through Bootstrapping to Accelerators, Angels and VC’s, could have been achieved with Crowdfunding alone in just a few months… food for thought. For now, let’s head back to our Entrepreneurs as their journey continues.

It’s been 3 months since Julia and James signed off their £50m Series A investment and the company has gone from strength to strength. The team has grown, the product is slicker than ever and it’s fast becoming a global must have. At this point in the story, a variety of things can happen. A larger company might notice your product and want to buy it from you. For example, Facebook recently paid a whopping $19 billion for WhatsApp. Many companies that continue to grow successfully find themselves with an offer from a Private Equity firm. Private Equity firms, like Venture Capital firms invest money from other sources (Pension Funds, HNWI’s etc) into a variety of ventures, including companies. However, when compared to Venture Capital the average Private Equity investment tends to be on the larger side, with some of the largest Private Equity investments in the tens of billions. A Private Equity firm typically seeks to financially restructure the company and then sell it on for a profit. Sadly, it’s not all happy days and many companies discover that despite initial enthusiasm their product quickly becomes stale. When they seek series B and C funding, investors have become wary and the company eventually dies from a lack of funding. Thankfully, this isn’t the case for our Entrepreneurs.

Julia and James succeeded in securing their Series B and C investments but their journey doesn’t end there. It’s been 3 years since the day they first met and discussed an idea. An idea that grew into a company and took them on the journey of their lives. Now they decide that they’re going to take the company public. ‘Going Public’ is effectively just another way of raising money by listing your company’s shares on the Stock Market. Once there, your company’s stock is available for purchase to the millions of people who trade their day after day. The process of listing your company’s shares on the stock market is called an Initial Public Offering (IPO) and involves an investment bank like Goldman Sachs or Morgan Stanley preparing your paperwork and calling prospective investors to buy your stock. In return for this service, the investment bank will charge a fee equal to 7% of all the money raised.

More importantly, for Julia and James the IPO is an opportunity to convert their ‘Restricted Stock’ into the kind that can be sold and either cash in, or hold on to their stock and sell it at a later date. Of course, their piece of the equity pie is a lot smaller than when they had 50% each. But in equity terms, it’s usually better to have a small piece of a big number than a big piece of a small one. Our Entrepreneurs sell some of their shares and watch as the company grows into the world conquering hero they knew it could be. In the months following the IPO they both decide to take some time out for themselves and take a long overdue holiday. After a week or so on the beach, James gets a call. It’s Julia, and she has an idea.