Crowdcube – Transforming Equity Finance

Luke LangWhether you’re starting a new business or looking to expand an existing one, the task of securing investment is notoriously difficult. Banks tend to adopt a no-risk approach to lending and venture capital funding can be hard to access.

Deciding which source of finance is appropriate to bridge the funding gap is made even more difficult in the current economic climate. As well as the more traditional routes to funding there are some innovative new ways that entrepreneurs can use to raise capital. Luke Lang, co-founder and marketing director of Crowdcube, explains how equity crowdfunding could be the answer.

How Crowdfunding Works

Crowdfunding works by allowing many people to pool small amounts of money together in support of a person, idea or business. There are two key types of crowdfunding. Rewards based crowdfunding allows people to give money to a project, idea or company in return for a token, or reward, related to that project,- perhaps a signed CD or t-shirt. Equity crowdfunding is becoming popular among small businesses and lets people invest in those businesses in return for shares. This is what the Crowdcube platform is. Here entrepreneurs can showcase their business and investment potential to thousands of micro-investors, ordinary people who act as virtual ‘armchair dragons’, choosing the idea, person or businesses they want to invest in. Entrepreneurs can upload a ‘dragons’ den’ style video pitch, images and supporting documents as part of their funding bid.

Investors can review the documentation and choose to invest from as little as £10; the average tends to be a lot larger – around £2,500 – with as much as £100,000 invested through the platform on numerous occasions. No money will leave investors’ bank accounts until the investment target has been met and the legal paperwork completed. There are no fees for investment and an investor will become a direct legal shareholder in the companies they choose to support.

Once everything has been completed the entrepreneur will receive the money they need to start-up or take their business to the next stage of growth and investors will receive a share certificate – and a share of any future successes.

Investors may benefit from the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) that offers generous tax breaks – up to 50 per cent – for investment into eligible companies.

Investing in start-ups and early stage businesses does however involve risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. Crowdcube is targeted exclusively at investors who are sufficiently sophisticated to understand these risks and make their own investment decisions.

Why Entrepreneurs are Turning to the Crowd

Crowdfunding offers entrepreneurs a fresh new way of raising money that has many benefits over the traditional methods of raising business finance. Firstly, by spreading an investment between many smaller investors the business can tap into bigger pool of talent that will have a vested interest in the businesses’ success. This might be casual help or more formal mentorship or non-executive directorship. The business is also less likely to be held to ransom by a single large investor who could withdraw at the last minute, negotiate an unfair stake or become an overbearing shareholder.

Crowdfunding democratises access to investment, which means that entrepreneurs can ask people to invest who previously wouldn’t have been able to, such as; family and friends, employees and even customers; all could now become stakeholders in a business and share in its success. Because they have a vested interest in the success of the business, these investors can also become its biggest advocates.

Tapping Into the Wisdom of the Crowd

The investment market has long-needed a more equitable approach and crowdfunding does this by making it easier for people to invest and support British businesses. It will give entrepreneurs an improved chance of securing capital by being able to tap into ‘new’ pools of wealth from ordinary people that can help kick-start Britain’s economic recovery.

Progressive, finance-oriented organisations, like Crowdcube, an equity-based crowdfunding company based in the UK, want to change the equity finance landscape making it easier for businesses to access the funds they need go succeed from alternative sources. Crowdcube was conceived before the economic downturn and the banks stopped lending. Since then the economic challenges facing entrepreneurs has only amplified. The benefits of crowdsourcing investment are only just beginning to be understood by entrepreneurs and it looks set to flourish further in future times of boom.

Crowdcube is the world’s first equity-based crowdfunding platform. Since launching in 2011, 42 businesses have raised £5.8 million through the platform. Crowdcube has over 32,000 registered investors. If you are interested in raising finance for your business or investing in a business then please visit Crowdcube for more information. Crowdcube is authorised and regulated by the Financial Services Authority.

by Luke Lang, co-founder of Crowdcube

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