Is equity crowdfunding a good investment option?

When Norfolk business owner Mike Hill decided he wanted to grow his vegan frozen pizza company he turned to equity crowdfunding and raised £250,000 to use towards his expansion plans.

This is not the first time the entrepreneur had used this method of raising money, which allows members of the public to invest in start-ups from as little as £50, since he launched his company, One Planet Pizza, with his son Joe.

He said: "Back in 2016 when we launched the company we used crowdfunding for the first time - we were the first plant-based business in Europe to use equity crowdfunding.

"We did it before we actually sold a single pizza.

"We only raised a small amount of money, but it was very successful and it was a really easy way for friends, family and vegan pizza lovers to get a slice of the business really early on.

"That was in 2016 and six years on the business has grown a lot, we've expanded into 11 countries, got over 400 points of sale in the UK and just launched in Asda as well.

"So it seemed like a really good time to do a second round of crowdfunding.

"We did that a couple of months ago and we raised over £250,000 in that round."

Equity crowdfunding is relatively new to the UK, with regulatory body the Financial Conduct Authority (FCA) authorising the first debt and equity crowdfunding platform, Crowd for Angels, in 2014.

Despite being less than a decade old, many new businesses are turning to it as a way to raise money to help fulfil their expansion plans.

For members of the public, many of whom have never invested before, it provides a chance to invest in a company in its early stages with the hope that, if it is successful, they can sell their shares if the firm is listed on the stock market or by receiving dividends.

In recent years two platforms have established themselves as the leading sites for equity crowdfunding in the UK - Crowdcube and Seedrs.

Miranda Hudson and Derek Bates, co-owners of Duration Brewing, which is based close to Kings Lynn in Norfolk, used Crowdcube for their goal to raise more than £350,000 to help refurbish and expand their brewery and taproom.

Ms Hudson explained that they decided to extend their equity crowdfunding campaign by a week after they exceeded their original target and set a new goal of £500,000.

She added that they attracted 510 investors and have been "utterly blown away by the support" their project has received.

"Reaching our stretch goal target of £500,000 would be great," she said. "We’ve already hit the initial raise amount of £350,000 which means the project is green lighted to go ahead."

The couple plan to use the money towards redeveloping the 16th century site in which their brewery and taphouse is located.

As part of their campaign they carried out a road trip across the UK, visiting major cities to attract investors.

Mr Hill warns that although equity crowdfunding can be a great way of raising money, it does take a lot of time and can require extra capital to gain support.

He said: "It's definitely not as easy as it was a few years ago, especially with the economic climate at the moment. Raising investment is quite challenging.

"There are some drawbacks to crowdfunding, but it is a very good way of not only raising the money but also creating awareness for the brand and getting people invested in the business - not just financially but also personally.

"We've got about 300 investors now, all of who have got a small slice of the business and they're a great way of keeping in touch with your customer base.

"So we involve them sometimes in our decision making and things."

The business owner added that the platforms charge a fee, which can vary but are usually about 4-10pc of the money raised and normally have a minimum fixed fee.

As well as this, businesses can "easily spend another £5,000 to £10,000 on marketing" to gain investors.

Mr Hill added: "It can be quite an expensive way of raising money because of the fees the companies take.

"If you don't do very well, or if you raise a relatively small amount of money, it's quite expensive compared to going to an investment fund or to agents.

"Also these days you really need to have a high percentage of the money you want to raise already committed by what we call direct investors.

"Some people don't realise that if you're trying to raise, say £500,000, through crowdfunding they will really want you to have at least half of that already committed by direct investors before you launch live on the crowdfunding site."

Despite the drawbacks to raising funds through equity crowdfunding, Mr Hill believes that it can still be a good way of attracting investors.

He added: "It’s worthwhile for some businesses, but go into it with your eyes open, especially at the moment, the investment climate has changed in the last six months so people are more risk-averse.

"A high percentage of crowdfunding companies fail, it is at the risker end of investment."

How to raise money through equity crowdfunding

A business owner wanting to raise money through equity crowdfunding will typically approach one of the two main platforms - Crowdcube and Seedrs - which will look at the business plan, research the company and review how much the owner wants to raise.

Often they will be asked how much of the target amount they have already got committed through friends, family and other investors.

If the target amount seems achievable the platforms will tell the business owner their fees and any other costs involved.

Prior to launching the campaign, companies will be encouraged to carry out a marketing campaign.

Mike Hill who has raised money through equity crowdfunding twice, explained that the process takes about three months from the beginning to the actual launch of the campaign.

He said: "It goes live from what we call the pre-launch when you raise awareness by going out to people and saying we’re going to launch this soon.

"This is an opportunity for those interested to pre-register. People can just click on a link and give their email address and say yes I’m going to invest £100.

"After that you go private and everyone who has pre-registered has a couple of weeks to commit. Then finally you go public.

"Before you go public you really need to be at 70-90pc of your target."

What is the difference between equity crowdfunding and crowdfunding?

Equity crowdfunding can often be referred to as crowdfunding, but these are two very different ways of raising money.

Crowdfunding is often used by organisations or individuals looking to raise funds from donations often for a charitable cause.

Colchester Museum, for example, set-up a crowdfunding campaign to raise £15,000 to hold a summer exhibition.

Those who donate to this do not expect to gain anything from giving money, apart from donating towards a cause they support.

With equity crowdfunding, however, the person investing in the business is hoping to receive a return on their investment.

Normally, it is hoped that the company will become successful enough to list on the stock exchange and the investor can then earn a return by selling their share.

Alternatively, investors can hope that one day they will be able to receive dividends from the firm.

While those investing in a business via equity crowdfunding are aiming to receive a return on their investment, because they are backing the business in its early stages there is a high possibility that the company will fail and they won't make any returns from their investment.

As such, equity crowdfunding is considered a high risk investment.