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.
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.