Up to this point, we have spent 2013 talking about impact-driven businesses, their corresponding business models, and highlighted some exciting examples from Brazil. But other than a bit of brainstorming around different models of incubation, there hasn’t been a lot of talk about how to finance them.
In our Impact-Driven Business Model post, we brought forth the financing stats from the 2012 Unreasonable Institute to show how investor appetite was growing for social enterprises with built-in business models. In today’s post, we are going to look at how crowdinvestment platforms are already being used to finance early-stage enterprises of all different varieties.
A couple of weeks ago, UK-based Seedrs, the world’s first regulator-approved crowdinvestment platform, published an infographic showing their results from their first six months in operation (July – December 2012). Despite the dealflow being slightly less than that seen in the recent JPM and Goldman earnings report, some great potential was shown : )
In that six-month period, £477,000 was raised on the platform by 12 startups. The size of the average deal during that period was £39,750, with deals ranging between £17,500 and £84,500. A variety of different types of companies raised capital in that period, from consumer-product startups to high-tech enterprises.
Of the 12 entrepreneurs who raised capital on the platform, 10 were male, while the average age of the entrepreneurs was 34. The average campaign took about 39 days to fund, with the fastest raise being achieved in 15 hours and the longest spanning 92 days.
Investors were getting on board with full enthusiasm, as about half of the investors on the platform made more than one investment, with the average investment being £585. Over half of the 5,507 investors on Seedrs, who ranged in age from 18 to 76, had never invested in a startup before. The reasons for investing in these companies ranked accordingly:
- 1) Desire to help get new businesses off the ground
- 2) Ability to access SEIS relief
- 3) Hope to achieve meaningful financial returns
On the whole, a very good first report from Seedrs, one that really demonstrates the potential of crowdinvesting to rebuild the economy and stimulate the early-stage financing market for small businesses and startup enterprises.
From the beautiful infographic, there were three things that stood out the most to us:
- 1) Investors trust the platform – the years of regulatory hurdles (ie. FSA regulation) and platform design decisions are proving worthwhile, as money is flowing through the platform to its intended target;
- 2) The Concept is Working – The Seedrs model, which targets early-stage enterprises (deals < £150,000) and investors of all types (no need to be accredited), looks like it is hitting the sweet spot;
- 3) SEIS is Having an Impact – the newly minted SEIS (Seed Enterprise Investment Scheme) program was ranked as the #2 reason by investors as to why they are investing in startups.
While it is still very early stages, these results are very promising. The crowdfunding business model takes a lot of time and investment to reach a level of scalability, but once it hits that level the growth-rate is tremendous (see Kickstarter). The key for Seedrs is to prove their model under the microscope of the FSA, so that they can build trust and credibility in the market. After six months of operation, it looks like they have achieved that and then some.
Last year, we wrote quite a bit about Seedrs, which allows everyday UK investors to invest between £10 and £150,000 in startup enterprises, as it was the first crowdinvesting platform to launch with regulator approval. The platform is targeting a very important gap in the market and helping to resolve the biggest problem facing entrepreneurs, raising early-stage capital.
Equally important, was the creation of the SEIS program, which essentially curbs the risk investors’ bear when investing in early-stage enterprises by offering an instant tax credit and capital gains exemption.
We have been talking a lot about the what so far this year – the need to create enterprises with built-in business models that focus on impact. A key to making the what come to fruition is figuring out how to finance those enterprises – that’s a big part of the how. While crowdinvesting is still only available as an option in a select number of markets (UK, a little in the US, etc.), it will eventually make its way into every market in the world.
In the interim, if you have an early-stage idea but can’t use equity platforms, traditional crowdfunding platforms, which collect funds using donations instead of equity, may be worth exploring as an option:
Overall, the Seedrs report is one of the first concrete examples to show how crowd-based financing will help bring badly-needed capital to the entrepreneurs who need it most. At a time when banks aren’t lending and the world needs impact-based businesses, the time is ripe to learn about how to make the crowds work in your favour.