Mozart’s first crowdfunding attempt in 1783 was unsuccessful, but he rebounded the next year when supporters contributed to assist him perform three piano concertos. The committee for the Statue of Liberty had insufficient financing for the statue’s completion in 1884. In five months, Joseph Pulitzer took matters into his own hands, bringing together 160,000 donors from all walks of life to donate $101,091, enough to complete the costs. Both are early examples of crowdfunding.
The founder’s perspective
Crowdfunding give a founder the opportunity to pitch directly to thousands of small investors, some of whom want to ‘put their money where their heart is’ in other words, invest in causes that they believe in and are passionate about. Another category of investors are customers who want to support a brand they use and perhaps benefit from shareholder discounts. These supporting factors are secondary to the investment case and cannot substitute for a thorough and well-researched business plan.
There are two levels of due diligence for a founder’s pitch. The first is from the crowdfunding platform itself. Its reputation is at stake and it will want to be sure that the business is genuine and all claims made in the pitch can be verified. The second is from the crowd itself, once a campaign is launched.
It is well worth joining a platform such as Seedrs to view some company presentations and see the questions being asked by investors, even if crowdfunding is not a route you are contemplating for your own business. This is an opportunity to view genuine pitch decks and see due diligence taking place in real time. Seasoned investors ask expert questions and get to the heart of the matter quickly. Often, feedback from investors who choose not to participate in a round is the most insightful.
BYP Network was created to change the black narrative, bringing black professionals together across the world in order to solve problems through economic empowerment and connectivity. BYP Network came to Seedrs in the summer of 2020, raising £896,947 from 1,204 investors in its public campaign.
Hear from BYP founder Kike Oniwinde Agoro about her crowdfunding journey in this video case study from Seedrs.
The investor’s perspective
If you believe in a company and want to help them develop and flourish, crowdfunding allows you to purchase shares in the company and be part of the business’ journey. There’s also a considerable group of individual investors who actively invest in private companies to achieve a strong return on investment. If the company’s value increases, the value of its shares will increase. Similarly, if the value of the company falls, the value of your shares will also fall.
The fact that you don’t have to be a High Net Worth (HNW) individual to get started and build an investment portfolio of private companies makes crowdfunding an appealing alternative investment asset.
Investing in early-stage businesses carries a high level of risk. The majority of early stage businesses fail, so returns are not guaranteed. The lack of liquidity in the shares is another risk in crowdfunding.
How is equity crowdfunding different from venture capital and angel investing?
Online platforms such as Seedrs, Crowdcube and Republic allow a group of investors (referred to as the “crowd”) to invest funds in a business in exchange for equity in that business. Instead of just one or a small number of investors, there may be hundreds, if not thousands.
Venture Capitalists (VCs) invest in startups using funds raised from limited partners including pension funds, endowments and individuals. Investment theses vary from VC to VC, with different firms focussing on different industries, company stages, geographies etc. On the whole, most VCs look to invest in very early stage businesses that they believe will be successful and provide the firm a 10-100x return on investment. Many VCs are ex-startup operators and investors, so can often bring a team of individuals with experience and skills that the startup might not have.
Angel Investors are individuals, or groups of individuals arranged into syndicates, who invest funds in businesses while also providing expertise, contacts, and credibility to help that startup grow. Angel investors often invest in enterprises right at the start of their development journey, before the company takes on venture investment from other sources, like VCs.
What are the different types of crowdfunding?
The sale of equity in a business to a large number of investors in exchange for their money is known as equity crowdfunding. It’s comparable to how you’d buy and sell regular stock on a stock exchange.
When a group of individuals donate money to a business or project with the anticipation of receiving products or services from the business in exchange for their contribution at a later date.
This is when a group of people donate money towards a charitable project with no financial or material gain expected in return. GoFundMe is an example of an online platform where donation-based crowdfunding takes place.
Peer-to-peer (P2P) lending
Peer-to-peer lending is the same process of borrowing capital from many investors as you would if crowdfunding. However, instead of offering equity, you are instead repaying back the money with interest – almost like a loan from the bank.