On rereading some of my blogs I realise that it might appear that I regard alternative funding sources as being, if not the panacea for all ills, then at least something close to it.
So it might seem astonishing for me to admit that there are circumstances in which I would have serious misgivings about advising clients to take the alternative route, and in particular equity crowdfunding.
History
It might help if I briefly describe the gestation of modern crowdfunding (courtesy of US equity crowdfunding platform Fundable – http://www.fundable.com ).
“1997- The Inception of Modern Day Crowdfunding
The first recorded successful instance of crowdfunding occurred in 1997, when a British rock band funded their reunion tour through online donations from fans. Inspired by this innovative method of financing, ArtistShare became the first dedicated crowdfunding platform in 2000. Shortly thereafter, more crowdfunding platforms began to emerge, and the crowdfunding industry has grown consistently each year.”
The best known names in the crowdfunding universe are Indiegogo, which concentrates on charitable donations, and Kickstarter, which started as a platform for creative projects which could be supported by friends , fans and the public in return for some type of reward, and has gone on to embrace most forms of crowdfunding.
The present day
There are now numerous crowdfunding platforms covering all sorts of possibilities, from the original base of social and artistic ideas, giving to and helping with projects, to the more recent and overtly commercial intentions of commercial fund raising for businesses. Whereas the original base for crowdfunding was clearly the USA, the UK market has grown very swiftly, to the extent that it is now a viable alternative to traditional routes for fund raising. The “domestic offerings” include:
· Loans – Funding Circle, Zopa
· Invoice discounting – MarketInvoice, Platform Black
· Equity – Crowdcube, Seedrs
So why do I have misgivings?
I recently saw an article on the GrowthBusiness website (an excellent source of ideas for growing businesses, by the way) entitled “The 55,492 dollar problem with Kickstarter” which sort of crystallised some of my misgivings. Essentially this boiled down to the fact that a man crowd-sourced $55,492 from 6,911 backers to make batches of potato salad; in other words, the platform was as likely to support frivolous enterprise as it was to help a proper business.
As with all things there are pros and cons, and you shouldn’t make a judgement on the basis of one – albeit extreme – example; but I do have doubts specifically about the use of crowdfunding in raising equity, for which there are a number of reasons:
· How do you ensure that all of the investment in your company is free of the taint of money laundering? – not accusing anyone, but it is my understanding that you or your representative needs to hold proof of identity for all of the shareholders in your company. In the case of a quoted company there are intermediaries (brokers etc) who have that responsibility; in the case of a crowdfunding round, I would guess that it falls to the business owner – unless the funding platform does those checks.
· How do you communicate with the shareholders? – you have a responsibility to give them information and it could be extremely time consuming, given the potential numbers.
· Who do you go to for further funds? – the normal first port of call for businesses is the existing shareholder base, and in some cases this may be required by the agreement with them – but this will not be easy with a large number of small shareholders, and you might not be able to take all of them with you, giving rise to what is commonly known as a suppressed (or hacked off!) minority.
If you are a potential investor in a business which has already had a crowdfunding round, the reputational issue referred to in the Kickstarter article may cloud the offer a bit (albeit that seems to be very specific to them), but it is more likely that the practical problems arising from a large shareholder register would give them greater pause for thought.
As far as the initial “crowd” investors are concerned, a second round or a company sale could be a bit of a problem; you might think that the new investors are getting their equity at rates which are too favourable; you might think that the price which the business founder has negotiated for a full sale is too cheap. In either case you might end up being the aforementioned annoyed minority!
Don’t get me wrong, I’m not saying that crowdfunding for equity is a no-no, but you need to have thought through the issues and have all of your ducks in a row before committing to it.
