Startup Equity Crowdfunding Grows in Europe (NESTA Report)

NESTA REPORTNESTA, the UK Innovation Foundation, has released the “The Venture Crowd“, a new report on crowdfunding as an investment tool. The report reveals that in 2011 alone, €1.5 billion was raised through crowdfunding for projects and businesses in need of funds. Amongst the different types of crowdfunding: Donation, Reward, Lending and Equity, the latter is on the rise as a fundraising mechanism for European startups.

For the purposes of the report, Equity Crowdfunding is defined as follows:

Equity crowdfunding is defined as the offering of securities by a privately held business to the general public, usually through the medium of an online platform. The model permits anyone to acquire a share in privately held businesses, i.e. those that have yet to float on a stock exchange, by allowing a business to offer a certain proportion of its equity for a set amount of capital it is aiming to raise. investors can then, through the platform, buy small parts of this equity stake.

It’s worth noting that angel investment platforms such as AngelList and CircleUp are excluded from this definition. While they provide huge value to the ecosystem and increase the density of network amongst startup and angel investors, they don’t unlock new sources of funding and don’t face the barriers of equity crowdfunding when dealing with a large number of non-accredited investors. The motivation for equity crowdfunding as an investment is intrinsic, driven by a combination of social and financial return. 

Below is a table of the equity Crowdfunding platforms operating in Europe:

Location

Capital raised so far through the platform

Fees

How investment is facilited

Vetting/Due dilligence by platform

Decision on how much equity
to offer

Funding window

Post– investment

UK

£3.7m

for businesses: 5% of amount raised + £1750 legal fees if successful

Both investor and business become members of Crowdcube Ltd for the period of the raise

vetting done before businesses accepted on platform

entrepreneur decides. Can increase equity during funding window

60 days as standard

Business decides threshold for voting rights

Nether– lands

€<1m

for businesses: €250 up front for existing businesses (start–up ideas can place for free) + 5% of amount raised + legal fees – only payable if successful for investors: 2.5% of investment amount + transaction costs

investment is via a co–opertaive established in the netherlands

Perform due diligence once target raised

entrepreneur decides. Can increase equity during funding window

Maximum of 1 year

indirect voting rights for all investors via co–operative

Belguim

€500K
from professional

for businesses: 12% of amount raised if successful

investment through an investment vehicle

Board of professional investors do their own due diligence before investing.

Agreement reached after negotiation

1 month as standard

voting rights for professional investors only

France

€2.5m

for businesses: 10% of amount raised if successful.
for investors: 5% of amount invested if successful.

investment through dedicated investment vehicle for each raise

Perform due diligence before raise

negotiation between platform and business after due diligence is performed

3 months as standard

Platform manages voting rights

Germany

€0.5m

for businesses: 10% of amount raised if successful.

investment through dedicated investment vehicle for each raise

Selection process with multiple stages and a board before business allowed on to platform

uses auction to decide on valuation

30 days as standard

no voting rights for investors

UK

Launching in July 2012

for businesses: 7.5% of amount raised if successful.
for investors: 7.5% of profit from investment

Seedrs hold shares on your behalf as a nominee manager

Approve disclosures as financial promotions beforehand and perform legal due diligence once target raised

entrepreneur sets amount which cannot be altered

3 months as standard

operate nominee model where they represent the interests of

post investment

UK

Launching in July 2012

for businesses: 5% of amount raised + £1750 Company Secretarial fee

facilitates financial promotion via membership model. working on next phase with fSA

vetting performed before business allowed on to platform

entrepreneur makes decision. BankToThefuture provides training to assist them

Maximum of 90 days

investors are collected into private group for updates. entrepreneur sets minimum investment amount to qualify for voting rights

UK

Launching
in September 2012

for businesses: 5% of amount raised

Both investor and business become members of CrowdMission for the period of the raise

initial vetting undertaken before business accepted on to platform. further vetting done if target is reached

entrepreneur sets amount which cannot be altered

Still considering options

Still considering options

The market opportunity for Equity Crowdfunding is ripe. Entrepreneurs are unable to access debt financing (bank loans) in the early stages of the startup, due to the risky nature of their business and typically lack of revenue. In the first stages, they rely on investments from FFF (Friends, Family and Fools) and business angels to launch their venture. Many companies shut down at this stage for lack of traction or their inability to raise funding. In order to achieve scale, startups require to raise venture funding, but to tap into VC funds, they would have had to reach a certain size or show the potential of exponential return. This is where equity crowdfunding comes in. If done correctly, it’s able to bridge the equity gap between the Angel stage (which seems to be moving upstream to higher amounts per cheque) and the VC funding (also moving up, typically starting from £2m rounds).

The equity crowdfunding gap

Can equity crowdfunding bridge the funding gap between angels and VCs?

While the increasing adoption of Equity Crowdfunding is encouraging for startups, the model faces several challenges. Below is a quote from the report:

  • Multiple motives. Openness can come with a cost to startups, as competitors, or investors in competing businesses could take part in equity crowdfunding. In addition, there will be different kind of investors mixed in one round, each with their own motivation, which can be damaging for the startup in case of a potential exit.
  • Adequate due diligence. Participants in equity crowdfunding aren’t necessarily savvy investors, and can therefore struggle to perform adequate due diligence on the venture. Investors need to find a way to detect fraud, and leverage the wisdom of the crowds to understand the potential of a business and the reputation of the entrepreneurs. Tools like Klout, LinkedIn Recommendations, TrustCloud, Kred and even eBay seller ratings can be leveraged to facilitate the process. A UK startup that comes handy in this process is DueDil.
  • Getting the right investors – More experienced investors would be helpful in providing evaluation support for smaller investors and platforms may want to consider how to entice them. Attracting the right businesses is another important task. not all businesses will be suited to crowdfunding and as the model develops, evidence needs to be generated to indicate what businesses it works best for.
  • Regulation. one of the main barriers to the growth of the model thus far is regulation, which has hindered the expansion in the number of equity crowdfunding facilitators. As interest in the model grows, there is a greater need for clear legislation in the area and an efficient process for authorising platforms.
Equity Crowdfunding - how does it work?

Equity Crowdfunding – how does it work?

The report concludes that as this is a new area of research with relatively limited data, there are many open questions that would require additional research. Generally speaking, while equity crowdfunding is a challenging area for the risks discussed, it brings several advantages for investors, startups and even policymakers, who are all looking for growth – economic, social and financial.

Link to download the full report for more information and case studies: http://www.nesta.org.uk/home1/assets/documents/the_venture_crowd

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Eze Vidra

General Partner, Google Ventures at Google
Eze is a General Partner at Google Ventures Europe. Before joining GV, Eze started Campus London, Google's first physical hub for startups, and led Google for Entrepreneurs in Europe. He's an experienced product manager and startup mentor. In 2012 Eze founded Techbikers, a non-for profit supporting children education in developing countries.
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Eze Vidra

Eze is a General Partner at Google Ventures Europe. Before joining GV, Eze started Campus London, Google's first physical hub for startups, and led Google for Entrepreneurs in Europe. He's an experienced product manager and startup mentor. In 2012 Eze founded Techbikers, a non-for profit supporting children education in developing countries.

8 Comments

  1. Hi, thank you for this interesting list. It is missing the first and most successful German platform for startup equity crowdfunding though… which is seedmatch.de. It has raised >1,5 Mio Euro up to date. 

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