Flexibility is an important part of what we offer businesses raising investment. Let’s take a look at how VCs and crowdfunding investors can work together to get deals done.
Since launch, the power of the Seedrs proposition has been the ability to aggregate a variety of different sources of investment into one investment round; whether that’s £10 from 50 of your friends, £10,000 from a collection of your customers or a £100,000+ investment from an institutional investor. The accumulation of these sources can turn into a meaningful capital injection for your business.
Equity crowdfunding does not necessarily mean turning your back on other sources of capital available to you. One of those other sources is often venture capital. At times, there is a misconception that if you choose equity crowdfunding you are ruling out VC or other institutional funding. In reality, many companies successfully tap the crowd and institutional sources of capital, often combining them in the same investment round on our platform. At Seedrs, we frequently work with VCs, angels and other sources of funds to deliver capital to growing and ambitious businesses.
This approach has precedents in some of our sister industries. A number of large financial institutions have gotten behind the P2P lending space, putting funds through platforms like Funding Circle and Zopa. It makes perfect sense that the equity crowdfunding space has followed suit.
Investment in your business from a well regarded VC undoubtedly sends a positive signal to the market. It’s a great validation of your business model and trajectory and signifies that you’ve met the particular investment criteria of the VC in question.
Crowdfunding can bring with it a different type of validation. In 2018, we saw our biggest year ever in investment activity, with £195M invested on the platform. Over 72,500 investments were made, from 60 countries, with an average of over £2,675 per investment. That’s thousands of investors with diverse backgrounds and expertise, who are inspired enough by your product to part with their own, hard earned funds. Crowdfunding can be the ultimate answer to the question: “will people buy my product?”.
Crowds and VCs: what do they each bring?
The best VCs add significant value to their investments, not just through the financial resources they make available, but also through mentorship, guidance and access to networks. The most successful businesses are picky about the VCs they partner with. While one VC may offer better economic terms than another, the best entrepreneurs understand when that can be outweighed by the intellectual value an investor can add to the business.
However, the “crowd” is far from faceless and has alternative value it can offer. Entrepreneurs can turn their passionate investors into active stakeholders and advocates for the business. It can often be the smallest investors who shout the loudest about the business they’ve invested in. The crowd provides you with an instant gang of followers, supporters, promoters, beta testers, customers and even potential advisors or introducers.
For maximum impact, combine VC expertise with an engaged audience you can use as a testing ground, who are willing to provide you with feedback and who have a vested interest in promoting the success of the business.
This was part of the reason behind Blow Ltd’s decision to combine funds from Seedrs investors alongside a £500,000 investment from Unilever Ventures. Blow LTD’s Co-Founders Dharmash Mistry and Fiona McIntosh turned to the crowd for the rest of the funds and said, “the success of our equity crowdfunding campaign means embarking on the next stage of the blow LTD journey with nearly 200 new brand ambassadors.”
The snowball effect
Entrepreneurs can often find themselves spending six months pitching to various investors. They get positive feedback from many of them and some say they want to invest…they just “need one more look at the sales projections”/”need to see you secure some other investors”/”need to wait for the investment committee to sign off.”
Getting investors across the final line can be difficult, and in the meantime it distracts you from running your business. But all it takes is one significant investor to jump, and suddenly everyone has the fear of missing out on your round.
We find that launching a crowdfunding campaign puts structure and formality around the process. It signals that you are serious about the funding round, crystallizes the valuation and puts a timeframe around the raise.
If you launch your campaign and start to gather some momentum amongst the crowd, this can encourage any offline investors you are talking to who have been on the fence about investing. Seeing the traction you have amongst crowd investors (who are potentially also your customers) can act as validation of the product for any VCs considering investing.
Similarly, the crowd’s interest will be piqued by a company that has attracted the support of a respected VC firm. In a combined round, the combination of VC and crowdfunding can really ignite your fundraising efforts and lead to a snowball effect.
An institution might not yet have the confidence to fill up your entire round. Institutional funds will likely have certain restrictions on the amount they can invest, based on set metrics around your business. However, they’ll also have strong views about how much money you need in order to deliver on your business plan.
This scenario can put a business in a catch 22: the VC wants to invest £1 million into your company, but is not willing to put in any funds unless you are able to secure the full £2m they believe is needed to achieve your targets. Many investors will not be willing to invest unless you secure your full target, since your business plans and projections are based on achieving that target.
“Top up” crowdfunding rounds are becoming increasingly common in this situation.
Adludio has first hand experience of combining various sources, and forms, of equity investment over the last few years. In 2012, Adludio (then Digital Spin) raised £60,000 via Seedrs. In 2013, they went on to raise around $1 million from an impressive list of VCs, including Passion Capital, Balderton Capital, Ballpark Ventures and Ignite100 to fuel their growth and technical development.
In July 2014, the business returned to Seedrs, with the support of its VC investors, to raise £300,000 via the world’s first equity crowdfunding convertible.
Adludio combined VC and crowd funds to great success. Howard Kingston, co-founder and CMO of Adludio recalls, “we hit our initial goal of £300,000 within 36 hours and went on to raise over £500,000.” The round included follow-on funding from their existing VC investors, existing crowd investors and many new investors – all on the same terms.
Howard says Adludio found the VC backing and crowdfunding complementary for a number of reasons:
“Firstly, the exposure we gained from being the world’s first equity crowdfunding convertible, with features in the FT, Forbes and TechCrunch, was invaluable. That publicity led to us attracting some incredible investors, including the founders of two well known advertising agencies who have been a great help.
Our existing VC investors were really excited to be involved in the crowd raise and many of them invested further in the round. They were very supportive of the process. At the same time, we attracted new investors we otherwise wouldn’t have been in contact with. All in all, it was a perfectly complementary round.”