What does equity crowdfunding mean?
Equity crowdfunding is the process by which individuals (referred to as the "crowd") invest in an early-stage unlisted company (a company that is not listed on a stock exchange) in exchange for shares in that company.
This means, through equity crowdfunding, you will be selling a portion of your business to a whole range of investors via a public campaign. Prior to crowdfunding platforms, only wealthy individuals, venture capitalists, and business angels would typically invest in startups. Equity crowdfunding platforms have helped to democratise the investment process by allowing a larger pool of potential investors to participate.
The Best Equity Crowdfunding Platform for Tech Start-ups
Entrepreneurs have a plethora of crowdfunding platforms to choose from now. Here are the well-recognised crowdfunding platforms, with highlighted pros and cons of each, to help you decide which one might be right for your start-up.
One of the most well known in the UK. Seedrs help businesses across a range of sectors. Seedrs can be thought of as a UK version of platforms like Kickstarter for readers outside of the UK. The primary distinction is that Seedrs provides early-stage investors with equity in the company, whereas Kickstarter does not.
Seedrs are also the first equity crowdfunding to secure FCA regulation making them a trusted platform that is highly beneficial for startups looking to raise funds.
Registration is free; however, new sign-ups are required to fill out a questionnaire.
Advantages of Seedrs:
- Regulated by the FCA
- Range of start-up investment opportunities across multiple sectors for businesses to get funding
- Open to the UK and international investors and businesses
- Range of equity, fund, and convertible campaigns
- Low minimum investments from £10
- User-friendly platform
- The platform’s Public Live round lasts 40 days with extension options.
- EIS and SEIS are two of the tax breaks available.
Disadvantages of Seedrs:
- The platform does not offer class A shares
- Fees Applicable for registration and on success
- Seedrs charges a 6% success fee plus a 0.5 percent payment processing fee to campaigners. In addition, there is a £2,500 completion fee (excluding VAT)
- The Seedrs Private Live round lasts 14 days and has no extension options
Crowdcube accepts a wide range of businesses, including startups and more established companies seeking funding. Crowdcube has raised millions of pounds for UK-based businesses and given countless investors a chance to get a foot in the door on early-stage business opportunities since its inception in 2011.
They employ a nominee structure model as well as a direct ownership model. Famous companies like Camden Town Brewery and E-Cat Club got their start on Crowdcube and were eventually acquired for a large sum of money, resulting in a large profit for the equity stakeholders.
Advantages of Crowdcube:
- Regulated by the FCA.
- Easy sign-up process.
- Range of start-up investment opportunities across multiple sectors for businesses to get funding.
- Open to the UK and international investors and businesses.
- Crowdcube has some good marketing features that allow business owners to promote their projects and expand their network.
- Crowdcube has three major "tiers" from which businesses can choose depending on the amount of money they need to raise.
- Once you start a pitch with Crowdcube, the company will use a data-driven approach to provide you with real-time data on how your company is performing.
- EIS and SEIS are two of the tax breaks available.
Disadvantages of Crowdcube:
- No mobile app
- You must first meet some requirements before applying for funding
- Fees applicable on successful campaigns
- Lack of transparency
This is possibly the most well-known reward crowdfunding platform around the world, with a 5% funding fee.
Kickstarter provides a platform for small businesses to get projects off the ground by offering supporters increasing levels of rewards in proportion to the amount pledged. Bear in mind though, that the platform is intended to assist you in raising funds for a specific project. You can, for example, raise funds to launch a new product line, buy materials and supplies, or open a new location. Without a specific goal in mind, you cannot use Kickstarter to raise funds to start a business.
While successfully completing a campaign on the platform is difficult, as Fundera states: “The truth is that only about 37% of business owners who launch a Kickstarter campaign reach their funding goal,” it might be a great way to raise funds for a smaller project - rather than starting a tech business.
Advantages of Kickstarter:
- Raise funds quickly for smaller one-off projects
- More control over your company as no equity is taken
- A community that is supportive of your company
- A chance to fine-tune your brand's message
- Your campaign can generate a significant amount of free attention
- Shorter fundraising rounds - 90 days - so save on fundraising efforts
- Free to use until you reach your goal. If your project is not fully funded, you will not pay for anything beside the internal costs you might have incurred for marketing your campaign.
- User friendly interface, with up-to-date statistics
Disadvantages of Kickstarter:
- To release your funds, you need to reach your entire funding goal
- No assurance that funded campaigns will produce a project or service
- Successful campaigns need to pay a fee.
- 5% of all funds earned will go to the crowdfunding site, and 3% is needed to process payments.
- You cannot contribute to your project, like you can in Seedrs and Crowdcube
- Most campaigns are funded by friends, family and local members of their community.
Indiegogo is another crowdfunding site, offering a reward and equity-based crowdfunding with a focus on technology and innovation.
Most campaigns on this platform are reward-based, with the same 5% funding fee as Kickstarter, but businesses can choose an equity-based model.
Advantages of Indiegogo:
- More time to reach goals, as campaigns run for up to 120 days.
- Indiegogo is popular for charitable financing, as it allows you to launch campaigns for personal causes.
- Unlike Kickstarter, Seedrs and Crowdcube, you don’t have to be fully funded to receive your cash.
- Excellent collection of promotional tools
Disadvantages of Idiegogo:
- Fees might be as much as 9% of the total amount collected.
- You might find yourself out of pocket, if you don’t reach full funding if you are giving rewards to people who contribute. (You’re still obliged to provide those rewards).
- Not the most popular platform in comparison to Seedrs, Crowdcube and Kickstarter, so it is harder to get traction.
Another well-known equity-based crowdfunding platform designed specifically for fast-growing startups.
With a difficult selection process, this platform works best when businesses have at least two team members, a viable prototype, and a proof of concept.
The site benefits from the support of seasoned investors and large corporations.
Advantages of SeedInvest:
- Process of competitive due diligence and screening
- Investors can invest in up to 25 businesses using the auto-invest option.
- There are several financing alternatives available to entrepreneurs and companies.
Disadvantages of SeedInvest:
- Not suitable for Investors who have been in business for fewer than five years.
- Expensive transaction charge.
- There is no mobile access.
- Only 1% of applicants are allowed to run a campaign.
Is equity crowdfunding right for your tech start-up?
Now that we’ve weighed up the pros and cons of each platform that is prominent in the UK, you might have narrowed your search down to one or two favourite picks.
At FundingHero, we think crowdfunding platforms are one viable way for start-ups to secure funds and launch their products into the marketplace. While looking for the best crowdfunding platform for your business can be time-consuming, confusing, and frustrating, the information in this post will get you started and help you decide which equity crowdfunding is right for you.
Now you understand the different platforms, see our other blog titled: Are you considering if crowdfunding is right for your start-up? This will help you determine the overall pro’s and con’s for your businesses suitability.
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