Hybrid Crowdfunding –  The Increasing Role Of Professional Investors

 

 

 

 

 

 

 

 

 

 

Surprising as it may seem, reality TV show, Dragon’s Den has been gracing UK screens for around twelve years.  Individual dragons have come and gone, but the format remains largely unchanged, with presenter Evan Davis providing an additional sense of continuity.  

Although it is on one level, simply a reality TV show, the ‘Den’ has also provided a millions of people with at least some insight into the decisions that drive equity investment in small firms. And in doing so, it can take a certain amount of credit for creating the kind of public interest in investment that has fed through to the creation of a burgeoning crowdfunding sector in the UK.  

When equity crowdfunding pioneer Crowdcube launched, it was pitched at an audience described by the company as ‘armchair dragons’.  These were people who had watched the BBC2 show and thought – perhaps for the first time – that investment in small companies might be worthwhile, fun and interesting. What’s more, many might have looked at the decisions made by the professional investors and thought: “I can do better than than that.”  

Aimed at armchair dragons, Crowdcube provided its community of investors with a chance to commit as little as £10 to each project. This was equity investment for everyman. A kind of revolution.  

A Different Beast

Fast forward to the present day and crowdfunding is a very different beast. For one thing, the investor putting in £10, £20 or £50 to a project is still a part of the picture, but average investments are actually much higher. On Crowdcube the average is £1,789 and general investors make up just 44% of the total community while 43% can be characterised as High Net Worth or Sophisticated investors.

In other words, equity crowdfunding – while still retaining a core of armchair dragons – has widened its appeal.

Hybrid Appeal   

So given that the crowdfunding concept has gained traction with professional investors, it’s not surprising that hybrid models have emerged, which blend elements of  ‘traditional’ crowdfunding with a model that is led by a much smaller group of people and institutions who have both large sums to commit and broad experience of equity investment.

One of the first to create a Hybrid Model was the Syndicate Room. Launched in 2013, the Syndicate Room differed from precursors such as Crowdcube and Seedrs by creating a platform on which all funding rounds were led by a professional investor – say a business angel – who would put up at least 25% of the finance and (crucially) handle due diligence. Other investors could then come in around the leader.,  

Others hybrids have followed Syndicate Room into the market. For instance, Growthdeck has positioned itself as platform that offers ‘private equity quality’ investments. The premise behind the platform is that many companies that raise cash through crowdfunding offer investors little chance of a return. Led by founders who have a background in the private equity marketplace, Growthdeck promises to deliver only the highest quality opportunities.  

Meanwhile, there are also sector specialist platforms aiming at HNW investors, such as Cogress which offers exposure to property for a minimum investment of £20,000.  

Gradually then, the crowdfunding model is no longer rooted in the armchair dragons concept.

The Business Perspective

From the perspective of a company seeking to raise capital, the opening out of the crowdfunding model offers an opportunity to seek out a platform that does more than simply raise cash.  

For instance, the Syndicate room not only brings fund-raising businesses into contact with professional investors who can add value by bringing their own commercial experience to bear, it can also deal with funding events on an escalator from seed rounds to Initial Public Offerings.

For its part, Growthdeck promises enhanced-value investor engagement and advice on the all-important exit strategy.   

The differences between platforms can be subtle but significant and any business seeking to sell shares should find out as much about the platform as possible.  

No two crowdfunding platforms are exactly the same and identifying the ideal provider can be a challenge.To help brokers and businesses identify appropriate providers, the Route – Finance has published The Alternative Finance Guide 2017. Download here.

 

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