Article by by C. S.-W. from The Economist about gathering together investors for start-ups
IN 2005 Venky Harinarayan and Anand Rajaraman, two venture capitalists, were approached with an offer by Sean Parker, the founder of Napster, once the internet’s biggest music-sharing service. In exchange for a small amount, they would be given a stake in a new start-up run by one of Mr Parker's associates. They took him up on the offer. Today they still own their shares in Facebook, and are much the richer for it.
The story of Messrs Harinrayan and Rajaraman is rare, but it does not stop some dreaming of a prescient ground floor investment in a company about to crest a wave of popularity. A growing number of websites on both sides of the Atlantic feed that dream by offering would-be venture capitalists the ability to chance their hand. Because of differences in regulation, however, British crowdfunding sites got an early start (in America soliciting such investments from the general public has only recently become legal, and not all regulatory problems have been worked out). To capitalise on their advantage Britain’s crowdfunders are now going international.
Seedrs is one such business. Launched in July 2012 the site initially offered investors the chance to put their money in Britain-based start-ups. This week it announced its expansion into Europe: it now also allows continental investors and entrepreneurs to use its platform. To be able to add momentum to this move, it is reaching out to investors via its own platform for the first time, hoping to raise £750,000 ($1.2m) for a 12,66% stake.
If it does not raise money for itself, Seedrs takes 7.5% of each successful funding round sourced from its crowd of investors. Nearly 50 start-ups have raised £3.7m in funding. The typical backer is a tech-savvy professional in his 30s or 40s, says Jeff Lynn, Seedrs' chief executive, but recent graduates looking for a nest egg and retirees hoping to boost their pension pot also support start-ups.
Crowdcube, another British crowdfunding service, announced last week that it has forged a technology partnership with a site in Italy, adding to similar deals it already has sealed with firms in New Zealand and Spain. In Britain Crowdcube has helped 81 businesses to raise nearly £16m, taking a fee of 5% of the amount invested. The average investor stumps up £2,500 for his stake. Most of the start-ups funded through the platform are based in the south of England; only a solitary Scottish start-up has won over backers. Four in five start-ups that seek support fail to raise enough interest, demonstrating that Crowdcube's users are discerning with their money.
Both platforms are regulated by the Financial Services Authority, ensuring that investors' cash does not disappear. And both are middlemen: they bring an audience to the product, and the product to an audience. But whereas Crowdcube introduces investors to investments and moves on, Seedrs manages the investments on behalf of its users until the firm is sold, goes public—or belly up.
Both services owe a debt to Kickstarter, a crowdfunding site on which backers are rewarded with gifts (a CD, a book, or a magazine) or early access to the products they support, rather than a share in a company. Those backing a Kickstarter campaign expect only a finished item, though. Those funding start-ups may want to have a say, even if their investment is small. Nearly 80 people invest in the average project that passes through Crowdcube. Getting them to sign the papers, for instance when a start-up wants to raise real venture capital may be hard. The risk is that crowdfunding today may mean herding cats tomorrow.