"I’m crowdfunding for the business I formed yesterday"

May 26, 2021

That may be just a tad optimistic; so is there a ‘too early’ to be considered when looking into crowdfunding? The immediate answer may appear obvious, but it’s not a straightforward yes/no outcome. For example, it can depend on your perspective - are you the business looking for investment or are you an investor looking for that next big thing?

The question the business owner might pose is, ‘why would an investor want to support my business at this early stage?’ Much like an investor asking ‘why would I risk my money in an early stage business?

And there are some polar opposites that can come into play. For example, an early stage business looking for crowdfunding will usually only be able to command a modest valuation for its first capital raises. Put another way, the level of equity an early stage business needs to release to secure investment is likely to be relatively expensive - a lot of equity for not that much investment. But for the investor, that may well be the very justification for taking the risk of early-stage investment, they could own a relatively large slice of the business for comparatively little cost.

Other benefits to the investor for supporting young businesses include the opportunity to take advantage of investment tax relief schemes, such as SEIS in the UK. Typically businesses can only offer tax relief-qualifying investment for the very early period of their existence. SEIS, for example, can only be offered by a business within the first two years of becoming operational. 

In some cases, early investors may have an opportunity to directly contribute to matters such as a business's product development roadmap or even the overall business vision and strategy. That can give an investor an increased level of confidence in the security of their investment.

This leads to the downsides for an early-stage investor, which a business must be mindful of as the investment strategy is developed. (Yes, you need a strategy for your capital raise activities; a topic all of its own.)

The main consideration is of course risk. The unavoidable truth is that around 20% of new UK businesses don’t make their first birthday and upwards of 60% are bust inside three years. (This is where the tax relief schemes, SEIS/EIS come into their own.) It’s a simple reality that the longer a business has been in existence, all things considered, the greater the chance of it remaining in existence. Hence why traction is relevant. An absence of any serious traction i.e. little or no revenue, nor compound business growth etc., does make a proposition inherently riskier, therefore an early-stage investor is likely to expect a larger slice of the pie. 

So let’s wind up with the big positive. The combination of early-stage investment, strong business growth, and the prospect of a final event of some sort that allows an investor to liquidate their shareholding - such as an exit -  is typically where there’s a win-win for both the business founders and the investor. Creating that future opportunity ‘merely’ requires a willing buyer - the investor, and a motivated seller - the business raising the capital.

 

Written by Richard Mojel, Commercial Director at ISQ Crowdfunding

 

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