Unlocking a new investment source for growing businesses

Since the global financial crisis of 2008, the popularity of crowd-funding has rocketed and shows no sign of slowing down. Matt Cooper, commercial director of pioneering crowdfunding platform Crowdcube, explains why – and how your business can get crowdfunded.

Crowdcube provides an alternative finance solution for small and medium-sized businesses. It was created partly as a reaction to the financial crisis, giving a new means of investment capital to promising businesses across the UK.

But even before 2008 there was a clear need for an alternative to bank lending, which couldn’t meet demand in an increasingly entrepreneurial environment.

This form of finance has grown up to fill a gap and is going from strength to strength. Demand is coming from both ends of the market: from small businesses looking for early stage capital to bigger, mid-sized enterprises who see the crowd as a useful litmus test for new products and services. Crowdfunding also provides an opportunity to engage existing customers and attract brand advocates.

It is also being fuelled by ‘digital natives’ – young people who have grown up with the Internet – who are starting digital businesses and are used to working with new technologies such as crowdfunding platforms.

They don’t see the bank as their first port of call for finance and are eager to experiment with ways of growing their business using cost effective online tools to support communications, HR and accounting, for example. These ambitious start-up businesses are setting the agenda for a new era of business lending.

Establishing a new frontier in finance

The picture of the crowdfunding ecosystem today is very different to when Crowdcube was founded in 2011. We were the first equity-based crowdfunder to launch and the market was essentially brand new.

Our first clients were predominantly fast-moving consumer goods brands requiring small amounts of money. Today technology businesses are our largest group of users (FMCG brands are second) and we’re periodically seeing single deals of £3 million or more.

The change has been quite dramatic in the last 12-to-18 months. It has pushed up deal value to an average of £400,000, with increasingly high-value deals going through.

In total we have provided £83 million-worth of funding in the last 12 months; a figure that has been bolstered by the growing number of co-investment rounds involving not just individual retail investors but also venture capital institutions.

Again, venture capitalists see the opinion of the crowd as a great way to validate their investments, knowing that investors are also often evangelists for the brands they plough money into. Partly for this reason we have completed 20 successful co-investment rounds in the last year alone.

How can your business get crowdfunded?

Crowdfunding investors are essentially the same as any other kind of investor. They are looking for businesses with potential to grow and create a return on their money. Businesses seeking crowdfunding need to have the right mix of ingredients to convince people they will do well.

Essentially that means having a strong leadership or management team, a persuasive growth story and ideally a measure of traction in the market already, such as a sticky fan base or proven sales.

We’re excited by the sort of opportunities any investor would be: a strong product, market opportunity and a clear path to exit.

We turn down a high percentage of the businesses that approach us, often because they are not quite ready for this kind of funding. We can raise seed money for pre-revenue start-ups under the SEIS scheme, but we do look for some kind of traction and forward momentum in the business.

When a business pitches to us successfully, we engage with them and work very hard to get them crowdfunding-ready. It’s a hands-on process and we give them the full extent of our expertise. We know what works and what doesn’t and as a result we have been able to fund more businesses than any other platform in the UK.

The process involves learning how to market your pitch, host investor rounds and maximise investment going into the business. We created a funding club, which is a support group for all 330 of our portfolio businesses.

Last year we recently made one of the world’s first equity crowdfunding exits with E-Car Club, followed by the second exit when Camden Town Brewery sold to AB InBev just a couple of months later. So it has been a great success.

All of the forecasts suggest crowdfunding will continue to grow rapidly over the next five years, with more and bigger deals coming through. Today, crowdfunding is no longer considered ‘alternative’, but a first choice for leagues of entrepreneurs seeking to grow their businesses.

To learn more about Crowdcube visit their website here.