Equity Crowdfunding - What does it cost?Oct 20, 2022
The thing with clichés is more often than not, they’re true. That’s certainly so of the well-known adage ‘You’ve got to spend money to make money’.
There’s absolutely no doubt that it’s possible to get a new business underway without spending a significant amount of cash. At least in the early stages. Even then there’s always the cost of opportunity, for example, you might have left your well-paid job working for the boss to become your own boss. More often than not, however, the cost of doing so is that while you’re putting sweat equity into your new business, you’re no longer drawing a comfortable salary and you’ve had to return your company car.
The time will come however when you’re going to need to inject actual money. You might be fortunate enough to secure some grant funding, or debt finance from your bank for example. But often the least hard route to take can be to raise investment in return for selling shares in your business. Note that I said the least hard route, not the easiest; there’s a subtle but important distinction.
Ensuring you're legally compliant
In most cases when you raise investment by selling shares in your business, you’re going to need professional advice and support. Again, there’s a lot you can do yourself but how much, and to what level will depend significantly on your own skills and experience. There’s quite a bit of legal compliance and administration involved in taking in equity investment, and that’s especially so when you start to move outside your own close personal contacts. Just by way of example, there’s a piece of legislation called the Financial Services and Markets Act, which amongst other things, prevents a company from publicly calling for investment in itself, unless the company is formally regulated by the Financial Conduct Authority. Similarly, there’s stuff around Anti-Money Laundering legislation and being required to accurately identify your investors and the source of the funds they intend to invest in your business. That’s all a topic for another time, just be aware there’s quite a bit to all of this legal stuff.
One of the benefits of crowdfunding on leading platforms such as Crowdcube and Seedrs is that they will pick up most of this tricky legal stuff. That’s one of the key things that you pay them for. These platforms are FCA-regulated meaning they have to comply with various rules and regulations designed to protect both investors and the businesses raising investment. Crowdcube and Seedrs work on a contingency basis i.e. you only pay their fees when your campaign succeeds. So if your crowdfunding campaign, unfortunately, fails then you won’t incur any success-based fees. (Note that any separate services you buy from the platforms around specifically marketing your campaign will normally still be billable irrespective of the success or otherwise of your campaign.) Expect campaign success fees to work out between 6-8% of the total investment raised but you will need to check if there are any minimum fees. Read more about how the platforms work here: Crowdcube and Seedrs.
When crowdfunding, you’re going to need a specific video for your campaign. A crowdfunding video is a formal part of what’s called the Financial Promotion. So what can and can’t be presented in a video is regulated by the FCA and managed by the platforms. The video is intended to support your campaign pitch in setting out your investment proposition and providing key background information such as introducing the key people in the business. Your video needs to be professional and you can expect to pay accordingly. The costs of a video can range enormously but it would be rare to spend much less than £2k absolute minimum; around £3k-£5k is more typical. ISQ can introduce you to our range of partners experienced in crowdfunding-specific videography.
Getting expert support
Lastly, there is professional support for your campaign. Again it is possible to develop and run your campaign totally on your own. But it’s a pretty risky approach. One of our clients recently shared two of his particular mantras, which are, “don’t reinvent the wheel” and “if there’s a proven process follow it”. He also added that he considered our guidance and support for his campaigns as "very valuable insurance to make sure you succeed". Bear in mind crowdfunding is by definition a very public thing, and the last thing you want to suffer is a very public failure.
So how does this all shake down? For a typical successful crowdfunding campaign, your total costs are likely to come out in the range of say 9% to 11% of the amount raised. Campaigns on the smaller side of things could have a cost of capital a bit higher than that, but of course, the actual amount in hard currency would be lower. In practical terms, most of the time businesses will seek investment inside a range, for example, £500k to £650k. So they will typically factor in the costs of the raise when arriving at the overfunding limit for the campaign. That means they’ll seek to cover all their costs and still get the money in the bank to meet the objectives of the overall campaign.
If you’ve done your research and believe you’re ready to move forward raising equity investment via crowdfunding, why not check out our quick and simple Readiness Quiz (and no, finding out if you’re ready or not won’t cost you anything!)
Author: Richard Mojel - Commercial Director - ISQ Crowdfunding