Crowdfunded businesses give up more than 10% of their equity

Start-ups and other businesses looking to crowdsource funding typically have to give away 12.4% of their equity to investors, a new report has found.

In equity crowdfunding, a number of investors all provide relatively small amounts of funding in exchange for a share in the company. There are other models of crowdfunding too – donation-based crowdfunding is a fast-growing model, which grew by 500% in 2015. It still represents only a small part of the market (£12 million) however and is generally restricted to charitable or civic projects.

The research, from equity crowdfunding platform Growthdeck, also found that businesses seeking crowdfunding might have a tendency to over-value their businesses. As the vast majority were start-ups that were not yet turning a profit, valuations are often provided using limited financial valuations.

According to Gary Robbins, co-founder of Growthdeck, this could have implications for the future of the crowdfunding sector. If crowd investors fail to receive a good deal based on a realistic valuation, this could affect their willingness to invest in future projects.

The average valuation provided by companies looking for crowdfunding was £3.2 million. The average level of investment sought was £311,490 but a significant proportion (8%) of companies had an investment target of £1 million or higher.

The alternative finance market has grown massively over the past few years, offering a number of different options for seeding or refinancing. According to a recent report published by the University of Cambridge and UK innovation foundation Nesta, the UK online alternative finance sector grew by 84% in 2015, providing around £3.2 billion in investments, loans and donations.

The growth level has actually slowed, from 161% in the year from 2013 to 2014, but the sector still showed significant levels of expansion across nearly all alternative finance models. Equity crowdfunding grew by 295%, rising from £84 million in 2014 to £332 million last year. This made it equivalent to 15% of all seed and venture equity investment in the UK.

By Phil Smith

If you would like to have a free no obligation chat with one of our advisers please call us on 0207 186 1144.

View all Business Insights