Equity Crowdfunding : The future of startup finance
‘Funding is available you just need to know who to approach’, a statement made at the recent Western Cape Funding Fair held at the CTICC in Cape Town, South Africa. Unfortunately it is not that simple. Every entrepreneur knows how difficult it is to source funding with the limited options, red tape and lack of support. However, there is a new alternative- Equity Crowdfunding.
Equity crowdfunding evolved from the success of crowdfunding which utilised well-known platforms like Indiegogo or Kickstarter to raise millions from people around the world supporting new and exciting projects and initiatives. People had a space where they could share their idea and receive financial support in the form of donations for ‘rewards’. The potential of this model was evident. The potential to diversify was evident.
Essentially, equity crowdfunding focuses on entrepreneurs and investors. Entrepreneurs utilise an equity crowdfunding platform to pitch their business plan and multiple investors ‘the crowd’ are able to purchase equity in the businesses. It’s a win-win situation for both and has created a type of online shop where entrepreneurs can showcase their innovative ideas and investors can select which ideas they would like to invest in. Furthermore most platforms also offer facilitation support to help navigate the relationship between entrepreneur and investor thereby creating a healthy eco-system around the growth of the business. This model is proving to be extremely successful as research agency Beauhurst’s analysis reveals that crowdfunding was outperforming private equity investment in the UK last year with Seedrs and Crowdcube, the two largest and oldest equity crowdfunding platforms, accounting for 21% of equity investment (Forbes magazine online).
Previously only a select few could invest in start-ups, however equity crowdfunding platforms help democratise the investment process. By investing an amount along with several others, substantial, even enormous returns are possible and risks and potential losses are minimised. BrewDog, a Scottish craft brewery, that built a successful business through several rounds of equity crowdfunding which included over 50 000 investors recently announced that “A U.S. private equity company has acquired approximately 22 percent of the company in a $264 million transaction. This minority investment values BrewDog at $1.24 billion” which means a 2765% return for original investors (Entrepreneur magazine online). In the process, BrewDog has developed a strong following and community and established itself as a key player in the industry.
The case study of BrewDog stands out and adds to equity crowdfunding’s successful track record of platforms like Crowdcube raising over £80 million in finance for more than 240 businesses since 2011 (Crowdfund Insider). Such statistics are increasing as equity crowdfunding more and more is being referred to as the ‘next big investment trend’.
Equity crowdfunding is a product of the times. Traditional methods of sourcing funding are becoming a thing of the past as people gravitate to the digital world, fostering online partnerships and connecting entrepreneurs with multiple people that share the same vision. This is the future of startup finance.