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Is equity crowdfunding a viable co-investment strategy?

It is possible for angel networks and VCs to invest in businesses online alongside smaller, individual investors, without facing the expected drawbacks of co-investing in this way.

Traditional methods of angel investing have been around for decades. Now, with the help of technology, the process has been taken online, through the introduction of online equity crowdfunding platforms, as well as other cyber-based alternative finance solutions.

The crowdfunding genre has been embraced by some and met with distrust by others. We’ve heard both sides, here at GrowthFunders, as we’ve had many conversations with a number of experienced angel investors and VC representatives who’ve expressed opposing views on the subject of whether allowing the crowd to get involved makes a mockery of the SME investment space.

One of the major concerns we hear voiced is:

“how can businesses conduct follow-on rounds when there are hundreds, if not thousands, of investors to deal with?”

Our solution? The nominee structure. 

What is a nominee structure?

A nominee structure is an arrangement whereby the shares purchased by “smaller” or crowd investors, who are usually categorised as such by investing less than £25,000 into a company, are held by a nominee. In the case of the GrowthFunders platform, GrowthFunders Nominee holds this title.

By holding the legal title to the shares, the nominee acts on behalf of crowd investors, not only making sure their rights are protected and that they retain full economic interest in their investment, but that all of the smaller investments are pulled together.

This means that the business owner, angel investor and/or VC, only have to deal with one other party, rather than the potentially-large number of people who actually made the individual investments.

Not only does this keep things simple for the business owner, in terms of keeping the administration activities to a minimum, but it also ensures that follow-on rounds are able to take place in a quick and streamlined manner, as only one signature (the nominee’s) is required. 

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What are the benefits for you?

There are a number of benefits to employing a co-investment strategy alongside a crowd which have invested on a platform that operates a nominee structure.

If the business owner isn’t having to spend time dealing with paperwork and hundreds of crowd investor-related queries, it means they have more time to spend it on the important things – ensuring that their business is growing, thriving, and achieving all of the goals set out in their business plan.

The due diligence you conduct could show you whether these crowd investors are:

  • from the business owner (or team’s) close network – ie family and/or friends who want to support        the venture because they have a personal connection and believe in the team’s abilities
  • members of their social media following and therefore potential customers
  • neither of the above; an outside party who is interested in the opportunity and believes it will                achieve its targets and go on to yield a financial return at some point in the future.

This can often serve as an indication of how the business will be/is being perceived in the real world.

Crowdfunding as an investing strategy can be beneficial for a number of reasons. It can provide the match funding that is often required by angels or VCs, therefore ensuring that a business or project becomes successfully funded, without having to find one other “large” investor.

Often, the crowd act as ambassadors for the business, spreading the word not only about the investment as an opportunity, but the service or product it provides too. This could help to build an audience of potential customers, and dependant on the stage of the business, could ensure that revenues start being generated straight away.

Following on from the idea of “crowd ambassadors” is the potential that exists for the business’ crowdfunding campaign to go viral.

A number of things could happen which would subsequently invite extensive media interest: the campaign could attract more crowd investors than any previous opportunity listed on an equity crowdfunding campaign; it may go into overfunding and raise a particularly large amount of capital; or someone of note may become involved in whatever capacity and catch the eye of the public / business’ potential customer base.

“There is power in unity and there is power in numbers.” – Martin Luther King. 

Co-investing as an investment strategy

If you choose to co-invest in businesses on an equity crowdfunding platform which uses a nominee structure, the experience you have shouldn’t differ too greatly from the times you may have syndicated in deals with just one other angel investor or VC.

Neither you nor the business owner will need to deal with hundreds of voices, and there should be no reason why their involvement should prevent follow-on funding rounds from taking place.
 
Equity crowdfunding platforms open up access to the early stage investment market, but structures have been put in place to involve them in a way which works for investors of all sizes – their inclusion shouldn’t be to the detriment of your (possibly larger) investment decisions.

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Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.