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The Rapid Growth of Crowdfunding for Equity

Crowdfunding for equity may not be the most obvious investment option available, but it’s hard to argue against its ever increasing rise in popularity with investors.

Since 2011, when it first started gathering pace in the UK, equity crowdfunding has been viewed as an attractive opportunity for investors. However, all investments come with a certain amount of risk and the more innovative the investment model, the more scepticism there is from investors.

That’s why analysing the growth behind crowdfunding for equity is an important step in assuring investors that it’s a model worth investing in.

The Early Days of Crowdfunding for Equity

Crowdfunding for equity first started to grow in the US market during the middle period of the 2000s; towards the end of that decade the first crowdfunding platforms were launched. These investment opportunities mostly centred on technology ventures and the success soon spread to the UK.

In 2011 the UK saw the launch of its first crowdfunding platforms and, since then, the market has continued to grow.

Continued Growth of Crowdfunding for Equity

During the model’s initial popularity in 2011, around £1.6m was invested amongst 7 projects. By 2014, however, a total of £24m was invested across 101 projects and that was just in the first 6 months of the year. This figure may not sound industry shaking when you consider that peer-to-peer lending generated £193m in 2013, but those half yearly 2014 figures reported for equity crowdfunding made up 18% of all visible deals in the UK.

When you consider that, in 2011, crowdfunding for equity only accounted for 2% of all visible deals in the UK, you begin to appreciate the sharp rise in the model’s fortunes. And this growth, of course, fuels interest in the model even further to attract newer investors to the model and continue its expansion.

However, analysing the actual investment at play in crowdfunding for equity would appear to be less successful than the hype preceding it lets on. 2.2% of total visible UK equity investment was attributed to crowdfunding for equity in the first half of 2014, but this was only a rise of 2% when compared to the same figures from 2011.

The small percentages at play, though, are misleading; equity for crowdfunding actually grew quicker between 2011 to 2013 than the total UK equity investment from the same period. This highlights the pace at which crowdfunding for equity is growing and why it remains a highly lucrative means of funding.

The Future of Crowdfunding for Equity

Crowdfunding for equity is becoming more and more recognisable to investors in the UK due to its rapid growth over the last four years. This has been further strengthened by the Financial Conduct Authority’s involvement in regulating crowdfunding for equity to ensure the model is correctly monitored and investors are offered protection. Although the majority of small to medium businesses are yet to dip their toe into equity crowdfunding, it’s expected that more and more of them will turn to this investment model in the near future.

One of the key components to successful crowdfunding is the involvement of angel investors who are proving to be a lucrative source of finance for businesses of all shapes and sizes.

It’s a good idea to understand exactly what an angel investor can bring to your business, so let’s take a look at their makeup and objectives.

The Basics of Angel Investing

Angel investors are those investors who look to invest their own capital in to investment opportunities such as crowdfunding for equity. Their investment will be made as either an individual investor or a group of investors.

Their aim, as with all investments, is primarily long term profit, but they also promise to bring plenty of experience to the project as well to help support the business and grow. Ideally, these angels are looking to make a return on their investment within 3 – 8 years.

In the UK there are estimated to be around 20,000 angel investors, but this number is steadily growing as the success of crowdfunding schemes gathers more pace. Despite a relatively small number of investors, they are regularly contributing around £850m per year which marks them out as highly productive investors.

Are Angel Investors the same as Venture Capitalists?

The traditional funding source for a business has been through venture capitalists, but angel investors are a very different and modern phenomenon.

Venture capitalists tend to deal in high amounts of capital – sometimes a minimum of £1m – whereas angel investors are more likely to invest in smaller amounts from £5,000 up to £500,000. This marks angel investors out as highly desirable investors when it comes to crowdfunding for startups.

Due to the large risks taken by venture capitalists with their weighty investments, they tend to delay the investment process due to their due diligence processes. Angel investors, however, are dealing with much smaller amounts of capital and are able to make their decisions much quicker.

And venture capitalists will often insist on forming and joining a board of directors to keep a close eye on their substantial investment. Angel investors, though, are much more likely to take a passive role in the day to day running of any investments.

What Appeals to Angel Investors?

Angel investors are usually wealthy entrepreneurs and have a keen eye for a good business opportunity. As a result they will look for certain aspects in a business to confirm it’s a viable investment opportunity.

The first port of call will be to identify and evaluate the team behind the project. Those teams which have amassed plenty of experience and relevant skills will always make for an attractive proposition. As with all business ventures, communication is vital from day one, so dealing with angel investors’ queries needs to be prompt and accurate.

Secondly, angel investors will strive to understand the project to see what their investment will be funding. They tend to favour projects which solve visible problems in unique niches as this promises better returns on their investment than opportunities in crowded marketplaces. And, of course, the potential returns on their investment need to be clear from day one.

Angel investors, then, stand out as a unique funding opportunity be it crowdfunding for equity or startups. Their investments can be seen as highly important steps in advancing the potential of business opportunities and improving performance.

You might think that with the budget of last week, it is all gloom for non-doms. However, it would pay to revisit a previous government initiative.

On 6 April 2012, the government introduced the very attractive Business Investment Relief (“BIR”) for non-UK domiciliaries. This is relevant if you are currently a resident in the UK, are treated for tax purposes as non- domiciled (non-dom), and have overseas income and gains.

Before 6 April 2012, if you brought, for example, £100,000 into the UK to make an investment (and are a 50% tax payer) then the amount you could have invested was around £50,000 after paying £50,000 in tax.  This would obviously discourage you from bringing your money into the UK.  However, if you as a non-dom now bring £100,000 into the UK to invest, you are able to invest the full £100,000 under BIR.

This is exactly what Business Investment Relief does, as it allows offshore resources which were previously excluded from the UK to now be invested in the UK tax free.

In effect – with top rate Income Tax rates at 50% – the UK Government is effectively giving a non-dom a subsidy of 50% on their investments.

In addition, you can also use the other reliefs such as EIS or SEIS when making an investment using funds remitted to the UK. This will also potentially save you up to 50% on your income tax bill (30% for EIS and 50% for SEIS).

For example, if a UK resident (but foreign domiciled individual) wants to invest £100,000 in a UK company using foreign income or gains, it can now been done with no exposure to tax; if structured correctly.

A £100,000 investment in an SEIS company gives back £50,000 (50% of £100,000) of income tax relief.  Therefore, in this example, the combination of Business Investment Relief and Enterprise Investment Relief would give the investor a UK taxation saving of £100,000 (being £50,000 BIR plus £50,000 SEIS relief).

Another relief is the ability for inheritance tax to be avoided.  If the investment is into an EIS or SEIS for example, it will qualify for business property relief after two years and therefore be inheritance free.

The Millennial generation is increasingly interested in crowdfunding, an alternative financing system that allows members of the public to invest in a pitch before its completion. Many small companies have already caught onto this trend, and are using digital platforms to fund start-up and independent projects. However, crowdfunding isn’t just about getting a project completed. It opens avenues for large and small companies alike, allowing them to source new customers, market products and pre-order sales. It seems that when crowdfunding is involved, everyone gains.

Crowdfunding was originally conceived to support the financing of small companies. It offers an enticing alternative to companies who are looking to think outside of the box, while attracting a younger and Internet savvy crowd. The adoption of crowdfunding has the potential to completely change the current workplace. As technologies continue to develop, the digital skills acquired by young Millennials contribute to their advantage. According to Telefonica UK Chief Executive Ronan Dunne, by 2025, 75% of the UK workforce will be made of Millennials. As the baby boom generation slowly fades out, Millennials will carry the key workforce.

There are several reasons to adopt an alternative financing system such as crowdfunding. The Millennials’ jaded perception of the current system, predominantly its commercialisation, acts as a major incentive.  Many view larger scale marketing processes as artificial and insincere; something that the personal nature of crowdfunding attacks head on.

Crowdfunding platforms allow individuals, small companies and larger corporations to run a campaign that offers a transparent story: connecting suppliers to consumers, and companies to their backers. Potential backers can contact companies directly through crowdfunding platforms to ask questions about the project and ensure they are investing their money in a worthwhile company. For Millennials, this connection is very important. 30% of Millennials believe they will not need a bank account in the next fifteen years. Not only is this due to a loss of faith in the current banking system, but also a belief in alternative financing. They are counting on alternative finance to overhaul the banking system.

The digital revolution has allowed individuals and small companies to be innovative in completely new ways, from mobile devices and operating ecosystems to social media. Crowdfunding platforms not only provide financial support for those who need it, but they encourage a community of followers too. By engaging with people who will potentially become your backers, you can listen to their comments and receive helpful feedback to continue to expand and grow your company. Like we’ve said, when crowdfunding is involved, everyone gains.

UK-Crowdfunding-Association

We are pleased to announce that Crowd for Angels are now proud members of the UK Crowdfunding Association (UKCFA).

The UK Crowdfunding Association was formed in 2012 by fourteen crowdfunding businesses. Their aims are to:

  • Promote crowdfunding as a valuable and viable way for UK businesses, projects or ventures to raise funds.
  • Be the voice of all crowdfunding businesses in the UK  (donations, loans and equity) to the public, press and policymakers.
  • Publish a code of practice that is adopted by UK crowdfunding businesses.

Crowd for Angel’s director, Tony De Nazareth, said: “We are really glad to become part of this credible organisation and work towards improving the crowdfunding environment for both investors and companies. We will work hard to support the UKCFA’s values.”

Crowd for Angels is the first regulated crowdfunding platform for equity and debt funding for both Private and Public companies. We support UK companies through all stages of their lifecycle, from seed, developing, pre-ipo and when listed.