Crowdfunding is gaining pace as a way for start-ups and scale-ups to raise investor funding. ThinkBusiness talks to Chris Burge of Spark Crowdfunding.
If you follow Ireland’s funding news quite closely, what start-ups or scale-ups have attracted funding lately, there is a somewhat common thread: Spark Crowdfundng.
Funding start-ups and scale-ups in Ireland takes many forms; as well as various State supports there is debt funding and there is equity funding via venture capital, seed capital funding, angel investment and crowdfunding.
“Covid has actually been surprisingly positive for the crowdfunding industry”
Crowdfunding, where the public are invited to partake in rounds has been on the Irish business landscape for the best part of a decade. Global players include Indiegogo and GoFundMe and there are even routes for creative professionals via platforms like Patreon. Locally in Europe, Irish businesses typically launched campaigns via UK platforms like Seedrs.
However, a local platform called Spark Crowdfunding has been particularly prominent in recent years, supporting the expansions of firms like Wellola which raised €180,000 as well as recent campaigns such as Dublin electric bike player Moby raising close to €800,000 and helping three Aer Lingus pilots grounded during Covid-19 lockdown to raise €278,000 as part of an overall €528,000 round to launch a start-up called Frequency.
We caught up with the CEO of Spark Crowdfunding Chris Burge to understand how crowdfunding works and why it is becoming an increasingly viable route for expanding businesses.
How viable is crowdfunding as a route for start-ups in Ireland and what kind of impact has Spark Crowdfunding had on the scene?
There is a significant unmet need here in Ireland for venture funding for early stage businesses. We’re trying to fill a gap in the market by making equity crowdfunding accessible to as many Irish start-ups as possible. Against this, we want to ensure that we only present our database of investors with opportunities in which they have a realistic opportunity to make a return of more than five times their investment over a 5-to-7-year time horizon. Unfortunately, not all start-ups are in a position to demonstrate that they can achieve that level of return for investors and hence crowdfunding is not a route for all start-ups looking to secure new funding.
However, we have been pleasantly surprised over the last two years that the universe of companies that can demonstrate substantial upside potential for a private investor is large and the calibre of companies that have raised funds on the platform is very impressive. One of the first campaigns that we ran, namely Fleet, the person-to-person car sharing app, subsequently raised funds on one of the UK crowdfunding platforms at a 3x multiple of the valuation at which they raised on our own platform. Over the past two years, 14 companies have raised funds on the platform and raised almost €3m in the process.
Many of these companies have been Enterprise Ireland High Potential Start-Up (HPSU) companies looking to raise matched funding to complement what Enterprise Ireland are investing. We are happy to hear from all companies interesting in raising new funds, whether they are new or well-established, in tech or more traditional industries, male or female founders, in Dublin or outside Dublin, pre-revenue or revenue generating. It costs nothing to submit an Application and while we do analyse all applications in detail before proceeding to campaign stage, the product for those who do make it onto the platform is very appealing. We have a substantial database of investors all looking for the next Stripe.
For businesses that are considering crowdfunding as a route, how should they prepare and what mistakes need to be avoided?
The quickest and easiest way to explore the crowdfunding route is to get in contact with us by email or by phone and we can discuss the process. Our model is entirely success based, so we will agree fairly quickly whether the project merits further consideration through the completion of our standard Application Form. About 30pc of the companies that submit an application go on to run a campaign on the site, so we have got very efficient at appraising which companies may be suitable for our investors and which may be not.
If we don’t think our investors will be interested in your business we will let you know as quickly as possible. It’s not in anyone’s interest to have a drawn-out process. Our process is quite straightforward for companies that have their house in order. Specifically, if they have Company Incorporation documents, a Tax Clearance Certificate, recent Management Accounts, Financial Projections, an up-to-date Cap Table, EIIS Approval and signed Contracts governing Employment Arrangements, Supplier Arrangements and Orders from Clients, and we are satisfied that our investors will explore the possibility of investing in the business, then we can move to campaign preparation quite quickly.
Every campaign requires three things: a Campaign Video, a Slide Deck and a longer Report that sets out the reasons why a private investor should invest. There are plenty of examples of these for each campaign on the website. We offer a hand-holding service throughout the entire process if that is something a company wants. This includes scripting the Video, the Slide Deck and the Investment Report, as well as preparing the Press Release and facilitating investor presentations, all of which are done over Zoom at the moment. We will also help companies prepare their Valuation Report as we know exactly what questions investors are likely to ask.
All too often we see applications where the valuations are excessively optimistic and we insist on founders preparing a valuation methodology report to support whatever valuation they are proposing. Another mistake that company promoters make is the messaging in their campaign Video and Slide Deck. Investors will decide within 3 minutes whether this is a business they would be interested in investing in or not. It is therefore critical that the messaging is on point and focuses on why someone should invest as opposed to product promotion.
What are the pros and cons of crowdfunding versus traditional venture capital or angel investment?
The major advantage of equity crowdfunding over traditional venture capitalist (VC) or private equity is that we’re always open for business!! We have a broad spread of investors that, as a group, will consider all types of investment opportunities. Speed and ease of process would be the next advantages of equity crowdfunding. Our typical campaign lasts for 30 days, after which the legal process usually runs for another three weeks. We have streamlined a process in which all new investors are managed using a Nominee Vehicle, which greatly simplifies the process for companies.
Companies that run campaigns also secure lots of free media exposure, which is an added by-product of the fundraising campaign, and is especially important for B2C businesses. Where companies who secure VC backing are probably better off, than if they used equity crowdfunding, is the support for follow-on fundraising rounds that they could expect from a VC. You wouldn’t typically see that with equity crowdfunding, although there is nothing to prevent a company raising funds again, as early stage businesses use equity crowdfunding as a stepping stone to further larger rounds. As our database of investors grows, we expect to increase the sizes of the rounds we are doing.
What does the future look like for crowdfunding in Ireland and has the Covid-19 crisis had any impact on deal flow?
Covid has actually been surprisingly positive for the crowdfunding industry. The two key drivers are start-ups looking for new funding and private investors having disposable cash to invest. Clearly, private investors are saving vastly more than they would have previously, because they cannot spend money on holidays, entertainment, clothes or many of the other things they would typically spend money on. Coupled with the fact they are receiving no interest with funds on deposit in the bank and they are understandably looking for alternative homes for their extra savings.
The average investment amount in each of our campaigns is €2,300, and the minimum investment is just €100, which makes it very accessible to the average investor. The imminent arrival of a harmonised regulatory framework for equity crowdfunding throughout Europe is also a very welcome development for the industry and will create lots more investment opportunities for Irish investors, as well as increasing the universe of investors to whom Irish companies can pitch for investment. With all the private sector cash sitting underutilised in Irish banks, we really think the Government here should be offering much better incentives for Irish investors to support great Irish businesses.
We would love to see the relief for Employment and Investment Incentive (EIIS) qualifying companies increase from the current 40pc to 70pc in the current environment. It’s only a tax rebate, after all, and would undoubtedly stimulate lots of new activity at the start-up level.
By John Kennedy (john.kennedy3@boi.com)
Published: 5 January 2021
