Posted on Tuesday 9 April 2013 by Ulster Business

Crowd Funding

Crowd funding will be the initial financing mechanism of choice for most start-up companies within five years, according to the investment director of one of the leading names in the fledgling sector.

Speaking to Ulster Business at the InterTradeIreland Venture Capital conference, Tom Davies (pictured) from London-based Seedrs said that the new asset class is beginning to gain traction.

Seedrs allows entrepreneurs to list their idea on its site, saying how much they want to raise (up to £150,000) and how much equity they are prepared to offer. They have to raise the whole amount for the deal to proceed. Investors are able to put in as little as £10 or as much as £150,000.

Davies said a combination of factors including poor returns from traditional investment classes, a desire among angel investors to spread their risk and the lack of available finance for early stage companies, mean it is a serious option for entrepreneurs and investors.

"I think within five years time crowd-funding will be the go to place for businesses to get that first bit of money to get going," said Davies.

"There are a lot of companies and ideas that never see the light of day because a person doesn't have a wealthy family or rich friends. So crowd-funding starts to make a lot of sense."

There are three categories of crowd-funding. The first, which many people have heard of, are donation based models such as the US platform Kickstarter – which is used for projects which aren't necessarily a long term business opportunity but which people support in return for the product or some small acknowledgement.

The second main category is the peer-to-peer debt lending carried out by the likes of Zopa and Funding Circle, where investors group together to lend money and get a return on that loan.

The third category – and the one into which Seedrs fits – is equity funding, where a lot of people put different amounts into a company in return for shares in it and a return when that business is able to pay dividends, is sold or launches an IPO.

To be eligible, companies have to either be pre-revenue or trading less than one year and registered in the UK. Seedrs operates at a level which is too small for venture capitalists, too much for friends and family, and before the stage at which most angel investors are interested.

"We are trying to help potentially high growth, potentially scalable, exciting businesses get the money to get started," he said.

"We're talking about the very first amount of money companies need to get off the ground. The average amount based on our research is about £50,000," he added.

"Based on our research it is the hardest capital to get in the entire lifecycle of business fundraising. Our view has been, rather than taking another mortgage on the house, crowdfunding helps you access a pool of capital that hasn't always been available, and it doesn't stop you then going on to get angel money. It enables you to get traction to have those conversations with angels."

Far from encroaching on angels' territory, Davies says that many angel investors are using Seedrs to help them diversify their portfolio of start-up investments – still able to take advantage of the tax benefits for early stage investments under the Seed EIS scheme.

Seedups also operates under a nominee structure, meaning the company which takes the investment only ends up with one legal shareholder, rather than a register of thousands.

That makes that company more investable if it tries to raise follow on funding from VCs and also gives protection to the small shareholders because Seedrs has a contract that ensures terms cannot be altered to put them at a disadvantage – for example by issuing new preference shares without their consent.

Davies also stresses that Seedrs is regulated by the Financial Services Authority, a key factor in making equity crowd-funding viable in the long term.

"I can guarantee you that if crowdfunding isn't regulated, there very quickly won't be a crowd," he said. "We welcome competition in the space because it brings more eyes to it. It means more people are looking at crowd-funding. But it has to be regulated because it is financial services just like the stock market. This is an investment that can take five or six years to pay off."

At present equity crowd-funding is illegal in the US, giving Seedrs a huge first mover advantage. It plans to be in all 27 European countries by the end of the year and Davies is confident the funding model will catch on.

"Kickstarter has raised $450m in the last three years from people donating money. That's from people putting money in and getting a watch or doing it purely for altruistic reasons. I can't believe if someone's got the opportunity to put money in to what could be the next big thing that they wouldn't do it, particularly when traditional asset classes are not the steady option they used to be."

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