Filling the Early-stage Funding Gap
by Jeff Lynn, CEO of Seedrs
Seedrs is an online platform for investing in seed-stage startups. We’re often referred to as an equity crowdfunding platform and are currently the fastest growing such platform in the world with over £1.1 million invested since launching in July 2012.
Seedrs was born out of a desire to solve two problems with early-stage funding. The first problem is that for brand new businesses, it can be very difficult to access the capital needed to take a first step, such as creating a minimum viable product for a technology company or leasing space for a retail shop. These businesses are too small for VCs, don’t have the traction required by business angels and are too high-risk for banks to lend to. So, unless the entrepreneurs have really wealthy family or friends who can invest such high-risk capital, there are few options.
The second problem is that investing in startups was traditionally available only to the very rich. Lots of people want the chance to allocate a portion of their capital to new businesses: it’s exciting, has produced strong returns historically and allows people to support friends, family and local businesses, and the government has introduced some really appealing tax incentives for doing so through the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). But due to transaction costs and legal restrictions, you have to invest a lot of money if you’re going to invest at all in the offline world – upwards of £10,000 per business. For many of us, this is too much invest in a risky venture – and creating a portfolio of these investments would be almost impossible. And even for those who can afford these larger investment amounts, the paperwork and time involved in sourcing and completing a large number of investments can be a hassle.
Seedrs has created the solution. Seedrs allows anyone to invest from £10 upwards in exchange for shares in startups chosen by the investor, and we make it simple for startups to raise up to £150,000 from their friends, family and other independent investors online.
Why raise capital through Seedrs?
Equity crowdfunding, generally, is a great way to get validation from the “crowds”, gain valuable feedback on your proposition and support post-funding, and most importantly, efficiently reach a large base of potential investors online.
But the key differentiator between Seedrs and other platforms is that we act as nominee for the underlying investors, meaning that a startup needs only to deal with us for administrative matters like consents and shareholder votes. This is far easier from an administration perspective than having to send notices to, and even solicit approvals from, hundreds of potential investors. At the same time, the startup can take full advantage of the invaluable feedback, experience and enthusiasm the investors can offer.
Even more importantly, this structure ensures that startups can raise further funding down the line. Private company finance can be complex, and often various consents, waivers and other unanimous shareholder actions are needed for the company to raise additional money. If getting consents depends on tracking down hundreds of investors all over the country (or the world), then as a practical matter the consent will never be obtained, and it is highly likely that the financing will fall through. As countless angels and VCs have told us, if they saw a widely-scattered shareholding base with no nominee in place, they would be deeply reluctant, or unwilling, to make an investment in the company. Seedrs, by contrast, regularly facilitates deals between portfolio companies and later-stage investors, allowing our startups to go on to raise top-tier venture capital and build great businesses.
Getting started as an entrepreneur
It is very straightforward to get started. Entrepreneurs simply register, thoughtfully answer questions about their team and business, including the amount they’re looking to raise and equity on offer, and upload a video for our internal investment team to review. Once we’re happy that all of the information submitted is fair, clear and not misleading, the listing goes live. Then, it is up to the startup to raise interest in their listing among friends, family and existing users.
Investing through Seedrs
Investing through Seedrs is a straightforward, transparent, secure process. Upon joining Seedrs, interested potential investors can either self-certify as high-net-worth or sophisticated investors or complete our investment authorisation questionnaire. The questionnaire allows us to confirm that potential investors understand the risks and concepts associated with investing in startups. Once authorised, investors are able to browse startup listings, ask questions of entrepreneurs and invest in the startups they choose.
Once investments are completed, Seedrs holds the shares as nominee for the underlying investors. With this structure, Seedrs is the legal holder, while the investors are beneficial owners and have the full economic interest in the shares – including the benefits of individual tax reliefs such as SEIS and EIS. We get rid of the administrative hassle by taking care of all the technical shareholder work while letting investors track and engage with their investments directly through the platform. More importantly, by monitoring the company’s compliance with its subscription agreement, we help ensure that its investors’ rights are protected—so that when the company has a big exit one day, the investors get to realise the full benefit of it.
There is no fee to invest, but investors pay 7.5% from any profits made down the line from an exit or dividends.