Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people. It is an alternative way to finance a project where traditional lenders such as banks are unable to assist. There are two main types of such funding:
- Debt funding sometimes referred to as “Peer to Peer” funding, the best known provider being Funding Circle
- Equity funding
As to Debt Crowdfunding this a valuable source of usually short-term finance where the provider can react far more quickly than the traditional High Street banks and often for smaller amounts. Our fees in sourcing such finance make it uneconomic for our clients who – as a result – we would encourage to approach the providers direct.
We are particularly interested in assisting businesses with Equity Crowdfunding where we believe we have an innovative and creative approach which the more traditional advisory firms find difficult to emulate. Please click here to view the slides of a recent presentation detailing our services. We typically help business owners who are looking to raise between £100k and £500k in equity finance which can often be matched by traditional bank finance. There are numerous Equity Crowdfunders in the market but the best known and those who we know are Crowdcube, SeedRS and Syndicate Room. They each have different approaches and business models. In all cases they should not be seen as a panacea and it is helpful if the business has some initial external equity to contribute to the venture while Syndicate Room insist on it.
- knowledge of the equity crowdfunding market
- knowledge of the criteria which needs to be met
- advice and assistance with the business plan
- credible forecasts
- advice on governance regimes and shareholders agreements
- tax advice, for companies and investors
- valuation advice
- ongoing advice and supervision by way of appointment to the Board
Our innovative approach and the remuneration we seek involves the following:
- A small initial commitment fee
- A fixed fee for the fund raise which is entirely contingent upon a successful fund raise
- An appropriate percentage of the equity to be negotiated at the outset
- Appointment as directors which helps provide credibility to the fund raise and which provides ongoing advice to the business and informal monitoring for the investors. We would expect an agreed directors fee for this
In view of the reputational risk that we are taking by being associated with the fund raise and joining the Board, we expect only to take on very few such assignments and must be convinced of both the viability of the project and of the probity and credibility of those we are supporting. We are happy to be approached direct but would also expect references from your existing bankers and other advisers. We are happy to consider start-ups but they must be from experienced business people.
As far as the businesses themselves are concerned they must fundamentally accept that:
- They must give up a percentage of the equity in the business – after all 70% of something is worth more than 100% of nothing
- To expect and indeed desire an exit event within say five years