‘Really hot’ market creates opportunities for UK entrepreneurs seeking access to finance

Crowdfunding reaches maturity…but entrepreneurs must do their homework

After a shaky start, crowdfunding (in its many guises) is now part of the establishment. Such has been the pace of change in the market.

Kostas Manolis is Partner at Downing – a fast growing VC outfit with £1.2 billion under management and £50m VLT funding available through the Downing/E2E fund. He pointed out that while it’s best known for equity finance, crowdfunding is an equally valid way to raise debt.

The prime benefit is clear: by communicating directly with the company’s potential customers, entrepreneurs can market the product at the same time as attracting investment.

That’s true, says Kieran Stone – Partner at Memery Crystal. “But founders should go in with eyes wide open. Crowdfunding sets you up as a very different business to one which goes down the VC route. For one thing, it’s a full time job to manage a crowdfunding campaign.”

Perhaps more importantly, says Kieran, is the potential impact on reputation. “If you fall short of your financing goals on a crowdfunding platform it’s a very public failure. One that will forever be part of the company’s record.”

Crypto is disrupting traditional forms of finance, but there’s risk attached

For those not yet up to speed with cryptocurrency, expert Paul Henderson, founder and CEO at Bartr Technologies, offers a simple explanation.

“Think of it like Disney dollars,” says Paul. “It’s the process of minting your own currency so customers can buy products and services within a new ecosystem.”

“Financial speculators like it because it increases liquidity and lowers cost. It’s a natural evolution of capital markets as we understand them.”

“The downside is that any crypto investment vehicle could fall foul of the regulator at any moment. Authorities are struggling to keep up with the pace of change and no one knows for sure where regulations might bite, and when.”

Investors invest in people, not just ideas

On the face of it, social media publisher LadBible (150 staff) hasn’t got much in common with Apple (125,000 employees). Not so, according to Hugh Chappell, serial entrepreneur and Apple’s ninth employee when he joined in 1979. “I see the same hunger in the LadBible guys that I saw in the Apple founders,” says Hugh.

“Angel investors like me are looking for people who are totally focussed on the business. When I met the LadBible guys they were just students, working seven days a week on their start up. Yes, they were early to market – they had a great product – but I could also see they were going to execute.”

It’s a seller’s market

All entrepreneurs want to know how much equity they should give up in return for investment. “Will I have to chop off an arm at the shoulder, or just at the elbow?” asked one audience member.
“Investing in startups is 99% art, but there is a little science involved,” explained Kostas.

“It depends on many things, not least the valuation. The management team should certainly retain sufficient equity to withstand a number of rounds until exit. Then ask yourself questions like how capital-intensive is the business model?”

“The good news is that the market at the moment is really hot. Government changes to the ESIS programme means that there’s plenty of private finance available to VCs. As a result, some of the valuations have been eye-watering – it’s definitely a good time for entrepreneurs to pitch.”

Always nice to end on a positive note – thanks Kostas!