Back in the 1990's, the rock group Marillion funded a US tour via an online crowdfunding campaign with their fans. Since this first recorded instance of online crowdfunding, the power of the crowd has raised many millions around the world, for a vast variety of activities and projects, via sites like Kickstarter and Indiegogo. This is called rewards based crowdfunding.
Equity Crowdfunding (ECF) is the next step.
Following the banking crisis in 2008/9, financial support for SMEs and start ups collapsed world wide. ECF can help to fill this void.
Since 2011, when the first ECF platform was established in the UK, growth has been exceptional. This is only expected to increase as more governments open up regulations to allow ECF platforms to operate in their countries. Specialisation will be the next step, with platforms targeting market sectors and growth phases specific to the numerous different outcomes sought by start ups and early growth companies.
As it suggests, ECF sells equity or shares in a company in return for cash or investment. This is an online process using bespoke ECF platforms. By using the function of the crowd, a large number of small investments can add up to one large company enhancing capital sum. Where thousands of Marillion fans bought tickets in advance to see their heroes, crowd investors in ECF buy shares in a company that they are interested in supporting and which they hope will go on to be successful. They can invest as little as £10. Companies typically raise between £20k and £2m. An ECF campaign has dual benefits – providing vital funding but also giving increased exposure to early stage companies' products and services.
As the norm, ECF platforms do not charge any up front fees, taking instead a percentage of the total raised if the campaign is successful. If the campaign fails to reach its target, then it will have only cost you your time.
As the sector becomes more sophisticated and knowledge of how to run successful pitches increases, so the need to select the right platform and put together a convincing campaign will determine success or failure. You only get the one chance and the campaign has to raise all of its target or the process is cancelled. There are some obvious and many not so obvious pitfalls.
ECF offers SMEs and start ups a new source of capital – a light at the end of the tunnel. To have the best chance of finding that light, businesses need help.