Once viewed as very different funding options with audiences at opposite ends of sophistication, venture capital (VC) firms and crowdfunding platforms are now collaborating and working together. For example Cocoon, an intelligent home security business, has just secured £1.025m investment from the UK’s leading insurer Aviva Group Holdings and Breed Reply Investments, and is now open for investment on Crowdcube.
Around 10% of all businesses funded on our own platform have some form of VC, institutional or corporate investment involved at some point in their history, and that rises to 50% when it comes to growth-stage business.
Having both the crowd and VCs involved can happen in a number of ways, such as a VC or larger investor forming the cornerstone investment to a fundraising that is also offered to the crowd, as Passion Capital did with the mobile challenger bank, Monzo. In other cases, it can be the other way round, with a crowdfunded company attracting the interest of professional investors further down the line: Farmdrop raised over £700,000 on Crowdcube in 2014, and later completed a £3m funding round led by Atomico, the investment company founded by Skype co-founder Niklas Zennström.
So how do you attract both the crowd and VCs and what are the benefits of having both on board?
Size is definitely a factor. Early stage or seed funding generally remains the preserve of angel or crowd investors. But for businesses looking for larger sums or follow on rounds of over £1 million, pursuing a mix of VC and crowd investment can help a company reach the desired funding target quicker, exploit the benefits of crowdfunding and get back to growing the business.
A recent trend we are seeing is VCs turning to crowdfunding platforms as a source of investment ideas, and joining Crowdcube and investing alongside everyday investors. This is a far cry from the original assumption that VCs would be put off by having a large body of crowd investors involved with a company as it would be too unwieldy to manage. The main reason the opposite has happened is that VCs are keenly aware that interest from the crowd provides real-time validation for a product or service, and can be an indicator of how well an idea may be received by consumers: market research by any other name. Crowdfunded businesses have also been in operation for a number of years now and any early concerns about the crowd shareholder base are increasingly being dispelled. In fact, a number of crowdfunded businesses have now exited successfully, including Camden Brewery which sold to AB InBev, providing a return to its institutional investors, along with over 2,000 people who invested through Crowdcube.
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From a crowd investor’s perspective, investing alongside a VC has a number of benefits. VCs are naturally very selective and will usually only become involved with a handful of businesses each year. They often back disruptive business models with large market opportunities that they believe can become ‘unicorns’ and deliver significant returns; for a crowd investor, the involvement of a VC is an indicator that further due diligence from professional investors has taken place and that the company will potentially benefit from their ongoing support.
Although the questions you get from both sides are generally the same (a business will need to explain the idea, market, team and financial forecasts) VCs may dig deeper and will typically spend a lot more time with a company because of the amount they are prepared to invest. They will certainly meet with the management, will probe forecast projections, seek to validate the market opportunity and invariably request a board position. And like the crowd, VCs are keen to see a business succeed and will harness their own network to provide strategic input and benefit the business.
To attract both VCs and crowd investors, business needs to be transparent, and often the higher expectations set by VCs around corporate governance can be of real benefit to all. But most importantly, businesses need to keep up a dialogue with all types of existing and potential investors. From an investor relations perspective, all investors require information about companies they have invested in and good investor relations will make any larger follow-on rounds much more straightforward to fulfil.