Crowdcube, the world’s first and now largest equity crowdfunding platform, recently moved into beautiful new offices in the heart of trendy Shoreditch – near the heart of Silicon Roundabout’s fintech district.
So far, Crowdcube has invested £689,234,678.in pitches and made almost 900 successful fundraises. Almost 731,000 investors are registered on the platform.
In 2015, Camden Town Brewery became the first Crowdcube-listed drinks company to make a positive exit. After raising £2.75m, the brewery was bought by AB InBev, the world’s largest drinks company, for £85m.
Fintech company Revolut is another Crowdcube success story. In 2018, the bank’s investors were offered 19x returns on their original investments. Revolut became the second Crowdcube unicorn.
Seven other Crowdcube-listed businesses have made positive exits so far, including cult pub chain and microbrewery Brewdog.
The next high-profile business to crowdfund on Crowdcube will be online wealth manager Nutmeg this summer.
However, Crowdcube has also seen a number of well-publicised blow-ups subsequent to raising funds on its platform.
Collapsed tech firm Recruitive Software, for example, failed to disclose to Crowdcube that it had fallen behind on tax payments when it raised £230,000 from investors. (Crowdcube says it is investigating what happened on behalf of its investors.)
And the Ethos yoga chain raised £709,460 through Crowdcube in April 2016 only to go into administration less than a year later. (Crowdcube says it is currently working with Ethos to try to reach a resolution in the best interest of investors.)
Matt Cooper, Crowdcube’s chief commercial officer, sat down with Growth Business to talk about how the platform has evolved from its beginnings in Exeter in 2011, the kind of growth businesses which appeal to Crowdcube investors, and what entrepreneurs can do to successfully raise equity through the platform.
What was the inspiration for Crowdcube?
The business was conceived to address the inequality of fundraising as a founder – at the time fundraising was linked to how wealthy your parents were and where you went to school or if you worked in the square mile – or in turn investing in those companies, which was linked to the same factors.
Why come to Crowdcube rather than just go to my high-street bank?
The majority of businesses we see don’t even know who their bank manager is – they’re banking with Tide or they’re banking with Monzo, they’re doing their accounting on Xero or QuickBooks – they’re early adopters of technology. The idea that these businesses have a meeting with their high-street bank manager is outdated.
Debt and equity are two different things obviously. Equity investment isn’t right for all businesses at all times, but what we see is companies understanding when to use what successfully.
‘What works well is when a business can tell a story that appeals to both head and heart’
What kinds of businesses are Crowdcube investors attracted to?
When the business was founded, the aspiration didn’t really extend past helping early stage businesses raise that friends-and-family or seed-funding stage of investment. Fast forward to now, we still serve that part of the “S” in SME but one of the changes in crowdfunding has been its adoption by much later-stage businesses, which has driven a lot of the growth in the industry.
We’ve proven our ability to move beyond just raising small amounts of capital for small businesses. We’re working with much later stage companies now, businesses such as Monzo, Revolut, Nutmeg and Brewdog.
What we tend to find works well is when a business can tell a story that appeals to both head and heart. We tend to find crowdfunding is all about good storytelling. The size of the business doesn’t matter, it’s their ability to communicate a story which appeals to investors heads and hearts.
How many applications does Crowdcube receive a year?
Circa 10,000-plus applications per annum.
How many go on to be advertised on the platform?
We will successfully complete a funding round for about 300 businesses this year. (A 3pc conversion rate.)
Who does the weeding out of applications?
It’s a combination of us looking for businesses that are crowdfunding ready and that will appeal to our audience. Also, the businesses weed out themselves. Raising capital is a serious undertaking that takes hard work, which requires an understanding of legal and financial issues in your business. Lots of companies start at the top of the funnel thinking this is an easy process and will filter down as companies realise, they need to be prepared. It’s definitely a process of natural selection.
How long is the approval process?
We know that a quick no is as important as a quick yes, normally within 48 hours. We talk about just-in-time – do you need the money right now? – and relevance – can I point to other businesses just like you who’ve done this successfully?
What else do I need apart from an appealing story?
We need a coherent business plan; how much capital do you require and what are you going to spend it on? Crowdfunding is increasingly being adopted by businesses with some traction, either a product out there in the world or a service that people are already using. It’s difficult to raise money for something entirely unproven i.e. off a business plan.
Lead investment is another thing – have you secured any capital offline before you start crowdfunding? Do you have an angel or friends and family who are going to commit to the crowdfunding round?
What’s more popular – seed funding or Series A?
We define seed as friends and family, and we don’t expect lots of traction at this point. It’s hard to raise just from a business plan. The second bucket is earlier stage, probably about £150,00 to £750,000, and beyond that you’re into the third-growth tier.
‘I tend to like businesses that deliver profit with purpose, leaving a positive mark on the world’
What’s the best pitch you’ve ever read?
The first time we raised capital for Monzo, its investment deck was both aspirational and exciting. It talked about having a million customers, which is quite a hairy-arsed goal.
I tend to like businesses that deliver profit with purpose, leaving a positive mark on the world.
Is there a kind of business that works best?
Community is super important, the concept of co-creation inviting an existing audience or customers who love you, which is the perfect platform to crowdfund.
Are you always looking for a tech component?
No, not at all.
What should entrepreneurs not do when pitching to Crowdcube?
Often a great route in is raising capital through somebody who we’ve raised capital for in the past. That says to us both that you’ve taken the time to work out a personal connection to Crowdcube and that you’ve also spoken to somebody who’s done it successfully.
We look for businesses that have successfully raised through Kickstarter or Indiegogo because that can often be a successful precursor to a successful equity crowdfunding round.
We look for companies to be realistic. If you’re saying that you’re going to be the next Uber and you want to raise £25m and the company’s only been incorporated for four months, you’re probably not going to get very far in our process. That’s not very realistic. Show us that you understand your market; show us what’s realistic for you raising capital. Too many businesses come into raising funds uneducated about what’s possible.
How hands are you in terms of the pitch?
Very hands on. We have to help you mould it to be an investable proposition to give you the best possible chance of reaching your funding target. We spend many hours a week out meeting companies.
What is the average amount raised?
About £750,000 and the average investment amount on a per investor basis is £1,500.
How much of the money I want to raise do you take as a fee?
We take 7pc flat commission and we charge nothing upfront. We’re in the trenches with the entrepreneur. We don’t get paid a cent until the entrepreneur raises the capital, which is why we work closely with businesses. A lot of our costs are upfront: find the business, educate the business, coach the business, work with the business to get their crowdfunding round ready. And if it’s unsuccessful, we don’t make anything.
Funding a business that investors use themselves seems to be a common theme
Absolutely. Bigger consumer brands work really well with crowdfunding because they have a large addressable audience who have a desire to have a relationship with that brand beyond the transactional. I may buy Brewdog beer in the pub, but I want to be closer to the brand because I love it.
One of the interesting things we’ve seen is that consumer brands are spending a vast amount of money figuring out how to have a closer relationship to their customers, and we facilitate that in its purest form by helping consumers physically hold shares in the company. That’s what’s driven this growth. It’s not because they need the capital, it’s because they want to have a deeper relationship with their customers.
What else is attracting bigger brands?
The amount of capital that a private company can raise through crowdfunding used to be pegged at €5m. Recently this was upped to €7m, which has helped drive the adoption of later-stage companies.
And the campaign styles being used by later-stage brands are now being adopted by earlier stage businesses.
That said, we’re not just for later-stage businesses, we work with a vast number of early stage companies. That’s where we started and it’s still important to us.
Some of your raises have gone on to go spectacularly bust. What would you say to investors who complain that all the facts weren’t spelled out on pitches Crowdcube hosted?
As a platform approved and regulated by the FCA, we review and approve every pitch on the site to ensure that all the information presented to investors is fair, clear and not misleading. We conduct thorough due diligence on the company, its legal structure and directors using leading third-party providers such as Creditsafe, Experian and Onfido. We also verify evidence supporting any claims being made by the business such as market size, contracts and partnerships to ensure the information provided is accurate. This process can take between there and four weeks, sometimes longer if the company or raise is complicated.
We’re pretty abundantly clear about “investing aware” and by-products of this industry is that it’s high risk and illiquid. We don’t’ like to see businesses go bust but early stage is high risk and scaling a business is difficult. Unfortunately, companies do go bust. We ask investors to keep their eyes open and make their own judgment.
What aftercare do you offer when investments go bad?
The main difference with what we do is that you haven’t got an option to sell. Building a business is difficult, market forces can turn against you at any point.
Do you have any plans for a secondary market where investors could buy and sell shares in companies they’ve invested in?
We do but we’re not quite ready to have a live and fully functioning bid and offer. We don’t believe the industry is ready for that yet. We’ve facilitated many transactions in private though, we just don’t have a public platform for it. We’ve returned many millions to CrowdCube investors.
How many of CrowdCube’s investments have indeed returned money to investors?
Twenty-three per cent of our investors have had an opportunity to realise returns but not all of them have taken up that opportunity, which equates to just over £20m.
When do you think you might get your first 10x venture-capital return?
We’ve had a few. For Revolut, investors had the chance for a circa 5x return on their investment in 2017 and a circa 19x return for their investment in 2018. And there are many other businesses with paper returns of that magnitude.
As an industry, we need to start seeing actual returns, not paper returns. But when you look at our history and when you at the majority of later-stage funding rounds from 2015 onwards, it’s that cycle of businesses that we would expect to see delivering shareholder returns over the next couple of years.
Eight years ago, the first funding round we did took six months to raise £60,000; we do £4 million a week now.
What is Crowdcube’s biggest challenge?
Helping more businesses outside the M25. The majority of equity capital is invested in businesses inside the M25 and what we’ve done by bringing fundraising online means founders don’t have to come down to London to meet investors.
That said, adoption of crowdfunding regionally is growing.
What other changes are you seeing?
Adoption of crowdfunding by female entrepreneurs is growing and we’re super proud of our role in overcoming gender bias in raising money both as a female founder and investor.