CROWD FUNDING 2015

Investing often used to seem like a closed shop - the preserve of a wealthy, privileged elite keeping business opportunities all to itself.

Now technology has blown open the doors and given everyone - not just the professional investors and big institutions - a chance to get a piece of the action.

Would-be Warren Buffetts can go online and buy shares in start-ups and early stage companies for as little as ￡10.

But while there's a chance you could be backing the next Google, Apple, or Facebook, there's also a strong risk you could end up losing all your money.

Online Dragon's Den

This is the world of crowd investing, also known as equity crowdfunding.

The difference with other forms of crowdfunding is that you're not lending money in return for interest on the loan, or donating money in return for rewards and perks, you're actually buying a slice of the company.

Typically, firms seeking a cash injection upload their business plans, including how much they're hoping to raise and how much of their business they're prepared to sell and at what price.

Think of it like an online Dragons' Den involving hundreds of investors rather than a handful of Dragons.

If the companies don't reach their funding targets, they get nothing.

It has been increasing in popularity as confidence in online financial transactions has grown and financial regulators around the world have begun to relax rules governing who can invest.

CROWD CUBE REPORT

ext week, the London Co-Investment Fund backed by Boris Johnson will announce that it has selected six partners to manage ￡25m worth of taxpayers’ money, which is to be funnelled into new and exciting technology businesses based in the capital.

The Telegraph has received a tip off revealing that one of these partners is the crowdfunding platform Crowdcube.

The sector has officially come of age.

Deputy Prime Minister Nick Clegg has praised the crowdfunding industry for financing early-stage technology businesses, the Financial Conduct Authority has built a regulatory vehicle for the industry, and the crowdfunding space is further legitimised by placing the fate of millions of pounds worth of growth capital in the hands of one of its platforms.

Crowdfunding allows the public to invest in start-ups and potentially make a big return if a company is successful. The risks are high – up to 75pc of these firms will fail, but the system has been lauded for democratising business investment.

This year, the equity-based crowdfunding market will be worth around ￡84m, according to recent figures from Nesta, up 201pc year-on-year. It dominates finance headlines as the innovative model through which new and established entrepreneurs can raise capital.

But there is an elephant in the room. Investors have yet to make any money from their crowdfunding investments. The only notable success to date is a German crowdfunding platform, Companisto, which raised money for its own business. Investors were recently offered twice what they invested but many are refusing the deal, insisting they could get more bang for their buck later.

Investor expectations are high, yet there is almost no tangible proof that the model works. Jeff Lynn, co-founder of Seedrs, one of the most established platforms in the UK, explains: “Building really successful businesses takes time and while we’d love to say, 'Look at all these fantastic exits’ the reality is that they are likely to take five to seven years.”

When these exits do materialise, Lynn warns there could be a rude awakening for many investors. “Not all crowdfunding platforms are the same,” he says. “There are cowboys out there that do not protect investor rights and we still have a long way to go, in term of regulatory reform, to bring them into line.”

Crowdfunding platforms typically offer two types of investment shares: Class A and Class B. Class B shares offer fewer benefits to the shareholders, can be diluted, and can be non-voting. “Some deals have been structured in a way that investors will never be able to see returns,” claims Lynn. “Even if the company succeeds, they will be worth absolutely nothing.”

This issue can be avoided by asking the right questions. For example, is this the same class of share owned by the founder? Or, does this deal come with rights and protections? But there are other dangers lurking for investors.

Better Capital founder Jon Moulton recently told delegates at a London Loves Business event that start-up companies were fiendishly hard to value and “deals are sold on hype rather than on any reality”.

But the news is not all bad. Crowdcube co-founder Luke Lang says his platform has raised finance for 165 businesses. Just six have gone bust over that time.

Eleven have raised follow-on rounds. Crowdcube itself raised two crowd rounds before securing ￡3.8m from Balderton Capital. “Having hundreds of shareholders does not mean you can’t raise further finance,” says Lang.

The arrival of regulation has also steadied industry nerves. As of April this year, prospective investors have been told they can only stake 10pc of their net “investible assets” into crowdfunding campaigns – for instance not their house, pension or life insurance. You can only invest if you are classed as a high-net worth or a reasonably sophisticated investor.

The FCA is still not sure that it has gone far enough. “We want to make sure the risks are properly disclosed,” says a spokesman. “Over half of these companies fail within their first few years. That means any investor is more likely to lose all of their capital than to get it back. Since these shares are not listed or otherwise traded on an exchange, you can’t readily sell them, so your money is locked up.”

The new regulations are not enforced by the FCA; investors are responsible for obeying the rules. But more hand-holding would be inadvisable, says Moulton. “You can blow ￡500 down at Ladbrokes and no one gives a rat’s,” he says. “People ought to be allowed to lose ￡5,000 to ￡10,000 a year if they want to on anything they fancy doing.”

There are still many unresolved questions in this nascent industry. Lynn admits it’s too early to tell whether crowdfunding will stand the test of time. “My greatest fear is that a crowdfunded company becomes hugely successful and exits for millions but investors that should have made money end up with nothing,” he says. “It will be a huge scandal and all the crowdfunders will be tarred with the same brush.”

FUNDING CIRCLE

I work as a Broker for the above and am preparing CLIENTS at present for this platform and this is no quick fix and you have to be prepared and have an Advisor on board who knows the ropes.

HOT TIPS

1. You have to be trading a minimum of 2 years
2. You need a Comprehensive Business Plan that has scored re the scoring underwriting as used by the Banks of 29/30 at least to include the Cash Flow for 3-5 years.
3. You need to have a Wow video with client endorsements -1-3 mins
4. You need PR traction and stories to be included in the Business Plan.
5. You need proof of concept – SALES
6. PITCHING whether on line of off should be 90 secs min to 3 mins and you should seek the support of a Coach to make sure it is the PERFECT PITCH
7. Be realistic in your figures – projections – targets and how this would work.
8. Have an exit strategy
9. A buy out strategy
10. And know the market for each Crowd Funding Platform – some like Retail and some wont work with Retail – know which ones do your Research.

Crowd investing is a bit like an online version of Dragons' Den, but with hundreds of investors

Online platforms such as Crowdcube, Seedrs, InvestingZone and SyndicateRoom in the UK, and Crowdfunder and CircleUp in the US, have been successfully matching investors with companies looking for funding.

According to innovation charity Nesta, nearly 30 UK equity crowdfunding platforms have raised approaching ￡100m so far, but this young market is experiencing "a 201% year-on-year growth rate".

In the US, where investment is still restricted to high-net-worth individuals or "accredited investors", research company Massolution estimates the crowdfunding market as a whole to be worth more than $5bn (￡3bn).

Wealthy "angel" investors are also taking their networks online - AngelsDen, for example - and encouraging smaller investors to join in.

Democratisation

"We felt passionate about the democratisation of investment," says Luke Lang, co-founder of Crowdcube, an equity crowdfunding platform launched in 2011.

"We wanted to open things up to ordinary people - investing was too elitist."

Crowdcube's 100,000-plus registered investors have successfully invested ￡45m in 160 businesses so far. While the typical investment is ￡3,000, amounts committed range from ￡10 to ￡400,000, he says.

"We tapped into a real appetite from the great British public to back and support British businesses. We've been able to make investing more accessible and affordable."

ALTERNATIVE FINANCE MARKET

The above market grew by ￡1.74 billion approx 160% more in 2014. thus SME reporting an average of 63% in 2014. We offer various alternative to match your culture and stage of your business. Funding Circle grew 3 times more than their competitors.

Crowdcube co-founder Luke Lang at the Eden Centre, Cornwall - the botanical gardens raised ￡1.5m through the crowd investing platform

It's a sentiment shared by InvestingZone chief executive Jean Miller. "You can do almost everything online these days, but unlisted equities is one of the last areas that has been overly mystified and kept out of reach of the ordinary investor," she says.

'Virtual pressing of the flesh'

Crowd investing enables people to be much more hands-on with their investments, argues Ms Miller.

"Once you've registered and downloaded our app you can browse the list of investments, download business plans, ask questions, talk to the founders directly through webinars, and share ideas with other investors through the online forums," she says.

"It's like a virtual pressing of the flesh - you have much more of a say and your shares come with voting rights."

Private investors tend to be less short-termist than venture capitalists, she argues, and perfectly capable of making their own investment decisions.

Now start-ups can appeal to the masses for funding, not just City suits

And while traditional forms of investment, such as funds, investment trusts and listed shares bought through stockbrokers, attract management and dealing charges, "buying shares through our platform doesn't cost the investor anything," she says.

Instead, InvestingZone charges 5% of the amount raised by the company, and crowd investing companies generally charge between 5% and 7.5%.

Since its launch in 2013, InvestingZone has listed nine businesses and raised ￡10m, but hopes to double these numbers in 2015.

Money to grow

Firms benefit because they get access to funding they may not have been able to get elsewhere.

For example, London-based salad dressing company Righteous could not get a loan from the banks but managed to raise ￡75,000 on Crowdcube to pay for a TV ad campaign.

This generated a lot of interest from the US, so the company raised another ￡150,000 to help it expand production and fulfil these new orders.

Salad dressing company Righteous raised ￡225,000 via Crowdcube

NearDesk, a desk space rental company, raised ￡1m through Seedrs, offering 22.56% of its equity to investors, while Fruitful, a peer-to-peer commercial mortgage lender launching on 24 November, raised ￡140,000 on Crowdcube for 10% of the company.

High risk venture

But the UK's Financial Conduct Authority (FCA) is stark in its warnings about equity crowdfunding.

"We regard investment-based crowdfunding in particular to be a high-risk investment and I know some VC Investment Companies that support the higher end of the scale will not be interested in those that have been supported by Crowd Funding platforms.

"It is very likely that you will lose all your money. Most investments are in shares or debt securities in start-up companies and will result in a 100% loss of capital as most start-up businesses fail."

There is also the risk that your initial investment could be heavily diluted if the company issues lots of new shares in subsequent rounds of fundraising.

But Nesta's research suggests the FCA's view may be overly bleak.

"Since securing funding, 47% of fundraisers have increased profits, 70% grew turnover and 60% have taken on new employees," its report says.

One big problem is that if you need to sell your shares to get some money back, you may not be able to. Shares in unlisted companies are not traded on a stock market so there isn't a pool of potential buyers to call upon.

A major drawback of crowd investing is that there isn't an easily accessible market for your shares if you want to sell

"We've always been clear about the risks involved," says Crowdcube's Mr Lang, "and one of those is that you might not be able to sell your shares in a hurry. There isn't a market to trade in these shares so you are locked in to some extent."

Investors only tend to book a profit if the company is sold or floats on a stock market, and that can take years, if it happens at all.

Finding buyers

This is where a company like Asset Match comes in.

It provides an online marketplace where investors in unlisted companies can find buyers for their shares through an auction process.

Sellers indicate the price they'd like to get for their shares and buyers indicate the price they're prepared to pay. An algorithm crunches all that data and works out the price it thinks most shares will trade at come the end of the auction.

Founder and co-chief executive Stuart Lucas says: "We think there is ￡300bn of equity locked up in these unlisted companies. Our technology allows investors to cash in and take some profit without the need for an intermediary."

Asset Match, which has been going two years and currently has 21 companies on its books, charges buyers and sellers 3% of the investment amount.

But such marketplaces will have to get a lot more companies on their books to create a truly liquid market in unlisted shares that's of real use to the equity crowdfunding sector.

Advice: What are you prepared to give away in terms of EQUITY before you begin this journey.