Imagine if Amazon had raised funds by doing an equity crowdfunding campaign shortly after they launched back in 1998 when their valuation was about €1m. Anyone who had invested just €1 in Amazon back then would have an investment today worth about €871,000 today.
The average investment amount in an equity crowdfunding campaign is €1,500, so an average investment in Amazon back in 1998 would be worth about €1.3 billion today!
Unfortunately, the average investor, like you or I, couldn’t invest €1,500 in Amazon back in 1998 because crowdfunding platforms, like Spark Crowdfunding, did not exist. Hence, it was only the Venture Capitalists who earned these massive returns on investments in startups like Amazon.
Does that sound fair to you? Is that a level playing field when it comes to investing in startups?
Equity crowdfunding platforms provide small and medium sized investors with access to exciting early stage companies, like Amazon. Essentially, these platforms make it as easy for a small investor with €100 to invest in a startup as it is for a venture capitalist with €1m to invest. This is what is known as ‘democratising’ finance and it partly explains why equity crowdfunding has become so popular over the last 6 years.
Where Dragons’ Den enables just 5 investors to invest in a startup, equity crowdfunding opens it up to the wider investor community and allows thousands of investors to invest in an early stage business. Equity crowdfunding is simply an online version of Dragons’ Den.
The Importance of the Crowd
Assessing investment opportunities can be a challenge at the best of times. How realistic is the company valuation, how good is the management team and how big is the demand for the product are just some of the questions an investor will ask. It is very difficult for any one individual to take all of these factors into account and make an informed decision. This is where the crowd can help.
In his excellent book ‘The Wisdom of Crowds’, James Surowiecki provides may examples showing that “a diverse collection of independently deciding individuals is likely to make certain types of decisions and predictions better than individuals or even experts”. Equity crowdfunding platforms provide the ideal vehicle for this, in two ways.
Firstly, investors can engage directly with company promoters and ask questions about the history or plans of the company, with the answers to these questions on show for all members of the platform. Second, and more importantly, investors can see exactly how much money other investors have pledged to invest in the crowdfunding campaign and use this information as a ‘signalling’ mechanism. If no-one is investing in a campaign it is a good sign that you should ask more questions before making your own investment decision.
Building a Portfolio of Small Investments
For every €1.3 billion investment opportunity like Amazon, discussed above, there are thousands of startups that go bust or return very little to the investors. That’s the nature of startup investing. Even Venture Capital firms get it wrong more times than they get it right. But the reason many Venture Capitalists succeed is because they spread their investments across a wide portfolio of investments. In general, for every 10 startup investments they make, six of them will be a write-off, another two will return the original investment and the last two will achieve the high multiples which will generate the required returns for the portfolio. This is precisely the type of investment approach that small investors should adopt and equity crowdfunding platforms, like Spark Crowdfunding, now make this possible.
Generous tax breaks from the EIIS Scheme for Irish taxpayers also reduce the risk by giving investors a 40% tax rebate on investments in Irish startups. Please contact us for more information about this.
Test the Water First
As with all types on investment, it is advisable to fully understand the risks before taking any action. We would recommend that investors fully familiarise themselves with all of the features of equity crowdfunding and also investing in early stage business, and even then, test the water by starting with a very small amount of money.
With the minimum investment amount of just €100 per campaign on the Spark Crowdfunding platform, a small investor can now build a portfolio of startup investments with as little as €1,000, and there are no hidden costs or fees for investors.
You don’t want to miss out on the next Amazon!!
As the number of startups now using equity crowdfunding continues to rise, a number of misconceptions have developed around the process. We have highlighted the 5 most common ones, to help give you a better understanding of how equity crowdfunding works.
1. Crowdfunding is all about getting money:
Whilst raising money is undoubtedly the primary purpose of many businesses crowdfunding, it is not the only benefit.
Crowdfunding provides an invaluable opportunity for engaging the market. You can engage existing customers and expose the business to new ones. Crucially, and unique to equity crowdfunding, investors will own a stake in your business. As a result, they have a personal interest in your future success and will act as evangelists by spreading the word about the brand going forward. Crowdfunding also affords an opportunity for improved customer feedback, as investors might offer insight on how to improve the product or service and might even suggest future products or services down the line.
2. An online crowdfunding campaign is all I need to raise the funds:
One of the most common crowdfunding misconceptions is that posting the campaign online will be sufficient in itself to raise the entirety of the capital. In other words, ‘the crowd’ is all that’s required. Unfortunately, it’s not that easy.
Although it is possible to generate the majority of the funds through previously unknown investors, many campaigns are heavily dependent on friends and family in the early stages to get the ball rolling. Ensure that these people know exactly when the campaign is going live so that they can support you from the outset. Be sure to contact pre-existing customers and business contacts also.
Now that your campaign has gained some initial traction it is much more likely to attract third-party investors.
3. The longer the campaign runs, the better:
This is inaccurate as a longer campaign window will only indicate to investors that you are less confident in your business’ ability to raise the required funds in a more normal time frame. It is greatly advised to raise a smaller amount of capital in a shorter amount of time, such as 30-40 days.
4. Launching a successful campaign is easy
This misconception is one of the more dangerous. Although crowdfunding can be a more streamlined and accessible process of raising capital than other conventional methods, it still requires work. Success on the platform is all but guaranteed. Whilst the campaign is online, a business should concentrate the majority of its resources into trying to make it a success. Chasing up potential leads, maintaining a social media presence and updating investors who have already pledged all require time and resources. It would be a mistake to think that an effective campaign can be maintained in your spare time as a result.
Moreover, research has indicated that businesses with more than one owner are more likely to succeed in crowdfunding as the burden can be shared. If you’re a sole proprietor, try to enlist someone else’s help to balance the ordinary course of business with successfully securing maintaining the online crowdfunding campaign.
5. Crowdfunding will put off VC’s and larger investors later on:
There has been no correlation between businesses that have successfully raised money through crowdfunding platforms and reluctance on the part of venture capitalists to invest later on. In reality, successful crowdfunding can fuel your business’ growth and put it on even better footing for subsequent negotiations with VC’s later on. Crowdfunding is indicative of your product or service’s popularity. A large number of people are buying into your brand, and this positive validation can be highly persuasive to subsequent large-scale investors.
How Awesome is the EIIS Scheme for Irish Investors?
“If you invest €10,000 in that company, you will receive €4,000 back in the form of a tax rebate, so you’re actually buying €10,000 worth of shares for €6,000. In other words, you can buy those shares at a 40% discount.”
That’s how the conversation started.
I was aware that the Government had some incentive scheme to encourage investors to buy shares in private companies, but I didn’t realise it was that good!!
“Are you serious? There is surely a catch somewhere”, I retorted.
“There’s no catch, although you only get €3,000 back from the Revenue in the first year, and only if you hold onto the shares for 4 years will you receive the final €1,000. The only other requirement is that the Company you are investing in has been approved by the Revenue to participate in this Scheme”, he said.
This scheme is known as the Employment and Investment Incentive Scheme, or EIIS for short.
As the name suggests, it was designed by the Irish Government to encourage investors to invest in small and medium sized Irish companies, which are basically the life blood of the country.
The best way to explain it is with an example.
Example of the EIIS in action
Fleet is an Irish person to person car sharing app which connects people who want to rent out their car with people who are looking to rent a car.
Fleet has been approved by the Revenue Commissioners in Ireland as an EIIS qualifying company, by virtue of its trading activities.
Fleet is raising €275,000 in return for 20% of the company on the Spark Crowdfunding platform.
An investor decides to invest €5,000 in Fleet.
Assuming the investor pays Income Tax in Ireland, he/she will be immediately entitled to a refund of €1,500 (i.e. 30% of €5,000) from the Revenue for making this investment.
If the investor holds the shares for 4 years, then they can reclaim an additional €500 (i.e. 10%) from the Revenue in that year.
What is the Net Effect of this?
Essentially, the investor is purchasing the shares at a 40% discount to the company valuation.
This is a very appealing tax benefit to investing in companies on the Spark Crowdfunding platform.
Further information on the EIIS Scheme may be found in this Guide from the Revenue Commissioners.
Fancy yourself as a bit of a Dragon? We all do!
But getting access to attractive deals is impossible and you probably don’t want to invest as much as the average Dragon. And it would be nice to able to take some comfort from knowing what other investors like yourself think of the investment opportunity.
Equity crowdfunding gives small to medium sized investors access to the types of deals only previously accessible to Venture Capital companies (or Dragons!). The crowdfunding industry has exploded in popularity in the UK, USA and Australia as a simple, quick and low-cost way for startups to secure venture funding.
We didn’t invent equity crowdfunding here at Spark Crowdfunding, but we were the first company to introduce it to the Irish market in mid-2018. Since then, our investors have invested €384,000 in Fleet, the person to person Car Sharing App; €284,000 in Campsited, the Airbnb for campsites; and €147,000 in Wellola, a med-tech video consultation app. Interestingly, all three of these companies are also Enterprise Ireland High Potential Startup companies.
The minimum investment amount in each of these campaigns was €100 and this was designed to appeal to as many small and medium sized investors as possible. This did not prevent larger investors participating also and each campaign had investors who invested €25,000 or more.
Tax Rebate for Irish Investors in Irish Startups
Irish investors can also claim a tax rebate of 40% of the value of their investment in many of these startups with EIIS (Employment and Investment Incentive Scheme) status. What this means is that an Irish taxpayer who invests €1,000 in one of these companies can reclaim €400 in the form of a tax rebate (€300 in year 1 and €100 in year 4). This reduces the risk or maximum loss of a €1,000 investment to €600. Please contact us for more information on EIIS.
Benefits of Joining Spark Crowdfunding
If you are a small to medium sized investor interested in hearing about new investment opportunities in exciting Irish startups, where the minimum investment amount is typically €100 and where you can actively monitor the amount invested as each campaign evolves and discuss the merits of the investment opportunity with investors like yourself, then Spark Crowdfunding could be for you.
How to Join the Crowd
Registration is free and only takes a couple of minutes. New members must answer a number of questions to ensure they fully understand the risks of investing in startups. Click here to register now. Investors are under no obligation to invest in any campaign and, as we don’t hold investor funds, no deposit is required until a campaign completes.
Spark Crowdfunding – Democratising the way in which Irish investors can invest in Irish startups.
Click here to register as a new member of Spark Crowdfunding for free: https://www.sparkcrowdfunding.com/register
Risk Warning – Investing in Startups is high risk and investors could lose the full value of their investment. Investors should only invest with money they can afford to lose. We recommend all investors seek independent financial advice before proceeding with any investment.
Equity crowdfunding is fast becoming the most popular way for Irish start-ups to raise new funds in return for selling shares in their company.
The advantages of this "Dragons' Den" type of fundraising include speed, ease of process and cost. Campaigns typically last 30-40 days, which contrasts with other types of early stage investing which can take up to nine months. The process is relatively easy, once the company has passed the due diligence requirements of running a campaign in the first place.
The costs are also very low as Spark Crowdfunding covers the legal and due diligence costs, meaning the company raising funds only pays the 6% fee on the total amount of funds raised. (Campaigns must achieve their full target in order to complete and no fees are charged if the campaign is not a success.)
But why should an Irish company use the Spark Crowdfunding platform to raise funds, as opposed to going to one of the UK or US crowdfunding platforms?
REASON 1 - Spark has the largest database of Irish Investors
We may not have the largest database of investors, but we definitely have the largest database of Irishinvestors. It stands to reason that Irish investors are likely to be more favourably disposed to investing in Irish companies. Meeting potential investors face-to-face is an important element of crowdfunding campaigns. Irish companies will not need to fly to the UK to meet potential investors.
REASON 2 - Spark doesn't require companies to have a minimum amount of investment committed
Many of the UK crowdfunding platforms require companies looking to raise funds to have a minimum amount of funding already raised prior to the campaign going live. In some cases, this can be as high as 40%, so if you're looking to raise €100,000, you will need to be able to demonstrate that you already have commitments of €40,000. Spark does not have this requirement, although we do recommend you have at least some commitment in order to generate early momentum for your campaign.
REASON 3 - Spark has local knowledge of the EIIS 'Tax Refund' Scheme for Irish Investors
For Irish taxpayers, the Employment and Investment Incentive Scheme (EIIS) allows individual investors to obtain income tax relief on investments made, in each tax year, into EII certified qualifying companies. It is an extremely attractive scheme for Irish taxpayers, who can reclaim 40% of the amount of their investment - 30% in year 1 and 10% in year 4. Therefore, if an Irish investor invests €1,000 in a EIIS qualifying company, the investor receives a tax rebate of €300 in the first year and €100 in the fourth year. The investment would need to fall by more than 40% before the investor would lose any money. We discuss this in a previous blog post.
REASON 4 - Spark has strong connections with Irish Media Channels
A key contributor to the success of an equity crowdfunding campaign is the amount of media exposure that can be generated for the campaign. If you speak to companies that have raised money on Spark, they will confirm that we have been able to assist them with media exposure. Good media exposure for campaigns is also good media exposure for Spark, so we have every incentive to assist Irish companies to maximise their media exposure.
REASON 5 - Spark uses Irish Solicitors
When a campaign finishes, the last thing an Irish company wants to be doing is engaging with a UK firm of solicitors. Spark is advised by Beauchamps, one of the leading law firms in Ireland. We also cover the cost of the legal fees, a significant saving over other forms of fundraising where legal fees can be particularly onerous.
REASON 6 - Spark assists with Digital Marketing and Social Media campaign promotion
A number of team at Spark are highly experienced and highly qualified (to Masters level) in the areas of digital marketing and social media marketing. We are very happy to share this expertise with companies looking to promote their equity crowdfunding campaigns using these new channels.
REASON 7 - WE'RE IRISH!!!
Spark Crowdfunding is an Irish company, located two minutes walk from Grafton Street on the fashionable South William Street. We are the first and only equity crowdfunding platform in Ireland. We want to assist ambitious Irish entrepreneurs and in turn hope these Irish entrepreneurs will, all else being equal, 'buy Irish'.
So, if you are a high growth Irish company, whether that's a start-up or a long-established business, and you're looking for a highly efficient way to raise new funds, come and talk to us at Spark Crowdfunding.
We're with you every step of the way!
At Spark Crowdfunding, we meet companies every day that are looking to raise new funds for growth. Many of the same questions arise at these meetings.
We therefore thought it would be a good idea to capture the answers to these questions in a single blog post and share it with our readers. Feel free to ask any additional questions on our Contact Us page.
1. How long do campaigns last?
Equity Crowdfunding campaigns typically last for 30 days, but it is at the discretion of the company raising funds as to how long a campaign will run. There is no law or rule that states how long a campaign could last, so, in theory anyway, a campaign duration could be as short as one day, or as long as 12 months. We would recommend something between 30 and 40 days.
2. Can I extend my campaign if I don’t achieve my target?
Yes. Campaigns can be extended any time during the campaign and for as long as the company raising the funds chooses. It’s perfectly normal for a campaign to be extended if a promoter believes a higher amount could be achieved by extending the campaign.
3. How much fees do I pay?
Investors pay no fees to invest in Campaigns. The company raising the funds pays a flat fee of 6% (plus VAT) if the campaign succeeds in reaching its original target. No fees are payable if the campaign does not achieve its target.
4. Are there any other Costs that a company must pay?
The Company raising the funds is liable for the Credit Card Admin Costs associated with collecting the funds. This is typically 1% of the amount raised. Another cost that needs to be considered is the cost of setting up the Nominee Structure that manages the new shareholders who invest in the company. Spark Crowdfunding can recommend a specialist Irish company that offers this service. The company raising funds is also responsible for paying its own legal fees. Please contact us for more information on the likely costs associated with each of the above.
5. How do I deal with all of the new Shareholders that come through my campaign?
Under Irish Company Law, the maximum number of shareholders that a private limited company can have is 149. Companies raising funds via equity crowdfunding often attract a large number of small to medium sized investors. Rather than adding all of the individual shareholders to the Shareholder Register, instead a Nominee vehicle is used to hold the shareholders, so that only the name of the Nominee appears on the Shareholder Register and the Company’s Cap Table. Therefore, if 300 investors invest in a crowdfunding campaign all of these investors will go into a Nominee structure and this Nominee will appear as one shareholder on the Shareholder Register and Cap Table.
6. How do I decide on the pre-money valuation of my company?
Company valuations are subjective and depend on many factors, including Annual Revenues, Net Profit, Financial Projections, Achievements to date, Intellectual Property, Previous Valuations and, most importantly, the Track Record of the Management Team. The company raising the funds makes the final decision about the pre-money valuation for a fundraising campaign. Spark Crowdfunding has a number of small investor clubs who would be willing to offer a perspective on a proposed valuation prior to a campaign going live.
7. What information do I need to provide before my campaign goes live?
Companies looking to launch a campaign on Spark must first complete our Campaign Application Form. This is quite a lengthy document that sets out the progress the company has made to date, the profile of the promoters and the growth plans for the Company, together with financial projections. This allows us to determine whether or not the Company is suitable for an equity crowdfunding campaign. If the Company appears to have good prospects and is suitable for a Campaign we then request a range of Due Diligence documents, including a Tax Clearance Certificate, Memorandum and Articles of Association, Company Constitution, Cap Table, most recent Annual Audit and the promoter’s CVs.
8. How do I promote my Equity Crowdfunding Campaign?
There are many ways in which a campaign may be promoted and we would be happy to assist entrepreneurs in preparing their strategy for this. A good press release announcing the campaign is important. The company’s own customers or users should also be invited to review the campaign and become a shareholder. Email marketing is a low-cost way to approach this. Social media marketing, using LinkedIn, Twitter and Facebook is also low-cost and easy to do. Paid advertising on the social media channels and Google could also be considered. In addition to the above, Spark holds regular investor evenings at which companies raising funds are given an opportunity to pitch. Spark also arranges webinars where companies present their campaign to an online audience.
9. What is the minimum an investor can invest?
This is at the discretion of the Company raising the funds, but we would recommend an amount of €100 as the minimum that an investor can invest in a campaign.
10. What is the difference between Equity Crowdfunding, Crowdlending and Rewards Crowdfunding?
Equity Crowdfunding involves selling part of your Company. New shares are issued to outside investors based on the number of shares an investor purchases. The disadvantage of equity crowdfunding is that the owners are selling part of their company, but the advantage is that the funds invested to not have to be repaid, nor does any interest need to be paid on the amount invested. Crowdlending is where a group of lenders is assembled and these individuals lend money to the Company. The funds need to be repaid, with interest, typically over 3-year period, but the company owners are not selling any shares in the business. With Rewards Crowdfunding, the people who put money into the Campaign do not receive an equity shareholding in the company, nor are they making a loan that needs to be repaid. Instead, they receive a reward, such as an early version of the product at a discounted price. Spark Crowdfunding only offers equity crowdfunding and is the only company in Ireland to offer this service.
11. Is Crowdfunding regulated in Ireland?
Crowdfunding is not yet a regulated service in Ireland. It is our understanding that the Department of Finance is looking at the whole area of crowdfunding in Ireland and we believe a new regulatory framework will be introduced in the near future, a move that would be welcomed by Spark Crowdfunding and the crowdlending platforms in Ireland. Spark Crowdfunding does not hold any funds on behalf of it clients, nor does it give any investment advice to its clients. Additionally, Spark takes no trading risk and does not invest in any campaigns on its platform.
12. How many investors does Spark Crowdfunding have?
New private investors are joining Spark every day and the company now has thousands of qualified investors on the database.
Equity crowdfunding is a simple, low cost way for entrepreneurs and companies to raise money from a wide pool of investors to fund their new ventures.
A company posts its Project on the crowdfunding website and specifies how much money it is looking to raise and for what percentage of the company. Entrepreneurs should think of their pitch as if they were going onto "Dragons' Den", highlighting the key reasons why someone should invest in their company.
Once the campaign goes live on the Spark Crowdfunding website, investors are invited to subscribe for shares in the company and can invest anything from €100 to €1 million. The higher the investment, the more shares the investor receives.
So, let’s say Acme Enterprises was looking to raise €1m in return for 40% of the equity in their company. If someone invested €500,000 they would get 20% of the company or if someone invested €250,000 they would get 10% of the company. Therefore, if someone invested €25,000 they would get 1% of the company.
Put simply, equity crowdfunding is a way for companies to raise money from a wide range of small to medium sized investors. Campaigns typically run for 30-45 days, depending on how much the company is looking to raise, although campaigns that are close to reaching their target can be extended, at the discretion of the company raising the funds.
The company must achieve its full target before a campaign completes 'successfully', although a higher amount than the initial target can be invested in the company. The company pays no fees unless the campaign is a success. The company pays a fee of 6% on funds raised - the investor pays nothing.
Contact Spark Crowdfunding today if you would like to discuss any aspect of equity crowdfunding in Ireland.