Equity-based crowdfunding is growing rapidly, and it is increasingly considered as a co-investment option for other types of investors (more than 40% of UK angels co-invest with platforms). Crowd financing platforms are associated to low potential type of retail, arts and crafts businesses, but this in changing rapidly.
Could it be an option for high-tech business? Before considering equity crowdfunding it is important to illustrate some of the issues associated with running such a campaign:
For smaller rounds of financing, crowdequity can be an important vehicle for bridging the gap between VC funding (despite exceptions).
Successful and well-executed campaigns can send a very strong message to the market and give you attention among investors for later rounds. At the same time, failed campaigns are visible to EVERYONE, while failed negotiations with angels and VCs are not.
Speeding up the deal through a platform. A good crowd-equity fundraising process can take three months from the time you approach the platform until the deal is complete. However, a longer negotiation period during platform entry, or complications at any stage, might lengthen the process.
Costs associated with the process include upfront expenses for signing-up to the platform, and success fees of around 4-5%. There is also an administration cost – managing the campaign requires marketing and communication with backers.
The campaign is standardized for everyone: each possible investor sees the same type and level of information. This can be a tough point for high-tech innovators, which need to find the tone to convince the less and the more techy investors.
You may plan to raise funds from a platform in another country. Crowdequity is regulated at a national level and, depending on the country, laws are applied very differently to companies, and also investors.
You can protect your IP through pre-sales. If your product is not patent protectable and you fear being copied by larger and faster to market corporates, pre-sales can be used as a defensive tool.
Overall, these considerations reveal important issues when founders are contemplating pursuing funding from angels. IRSUS is providing a set of webinars based on inspirational stories and “how to list” sessions by platforms managers.
By Amparo de San José and Thomas Klueter
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The Innovation Radar (IR) is an EC initiative focused on the identification of high potential innovations and the key innovators behind them in FP7, CIP and Horizon 2020 projects. It supports innovators by suggesting a range of targeted actions to assist them in fulfilling their potential in the market.
This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 779990