[This post was originally published on Social Media Week blog]
Crowdcube is the world leader in equity-based crowdfunding. Launched in February 2011, the UK based platform has set the pace in bringing to the fore a new mechanism of raising capital for entrepreneurs and established businesses alike. Just before Christmas twintangibles managed to get the chance to speak to Luke Lang, one of its founders shortly after they had successfully used their own platform to raise a significant investment. This is a transcript of that interview. The audio version is available here.
TW: Luke thanks for taking the time to speak to us about Crowdcube. Can we go right back to the beginning and tell us a bit about the origins of the project?
LL: The idea behind Crowdcube has been developed by myself and my co-founder Darren Westlake. We are both experienced entrepreneurs set up business in the past, and experienced for ourselves the challenges of raising finance for a start-up and growing business can be. And it was our opinion that there must be a better way of doing things. It’s very much our opinion that business finance hasn’t really changed a great deal for the past two hundred years with bright entrepreneurs with a good idea go cap in hand to wealthy individuals looking for money and those wealthy individuals are not necessarily the best people to decide whether you have got a good idea or not. So we firmly believed that there must be a better way of doing it and a way of democratising investments so that anyone can get the opportunity to invest in small start-up and growth businesses, and really give entrepreneurs the ability to tap into new money, people who would have previously been priced out of being a business angel because they didn’t have enough savings, say £50,000 or £100,000 in the bank to invest.
Crowdcube empowers entrepreneurs to attract investment from friends and family easily, and give customers and suppliers the opportunity to become part of their business and to engage with their business on a new level. So that was essentially the core foundation of it. I guess if you wanted the two founding principles they were, firstly anyone should be able to invest, we really wanted to democratise investment and empower the general public and we coined the term “armchair dragons” so people sitting at home could make the decision if they wanted to invest, and secondly the people that did invest should get real shares in that business. So it was really important to us that those people investing were taking a real stake in the business.
TW: And that is something that is very distinct about Crowdcube isn’t it? There are other crowdfunding platforms that allow you to fund a business but Crowdcube is specifically about taking equity isn’t it?
LL: Yes taking a real equity stake was really, really important to use. You know when you’re raising money for businesses or investing you are investing for the future, you are investing because you think that a company has a future and you believe in it, and you want to be part of that future and that success. It’s very much the case that we see that there are two main reasons why people invest in a business, firstly its participation and a new level of involvement and engagement with the brand, helping the brand, advocating and supporting that company and really helping them to kick on to the next level.
So, firstly there are there these very philanthropic reasons, and those reasons are equally applied to the person investing £10,000 as £10 pounds. Secondly, for those that have traditionally invested larger sums of money, they also want to get payback they want to get a return on their investment. They are not just doing it for the from the goodness of their heart, although that may be a contributory factor, they are really keen to generate a return and those are the two core reasons as to why people are investing, and having equity is a key part of that as without it it would be difficult to attract the larger sums of investment.
TW: There is an inherent risk I suppose in it as with a reward based model, be it a “keep it all” or “all or nothing” model, if they make the target you get your reward, but with an equity model you are buying a potentially more risky investment, it could go up or it could go down. So it’s a quite a different relationship involved because of that added risk.
LL: Absolutely. We make no bones about it. It certainly is risky investing in any business, particularly start-up business, we have developed the facility for people to have rewards as well as the equity stake, so we recognise that certainly for the smaller investment between say £10 and £2-300 there was an idea that those investors should get something earlier on the process, and so get something back a little quicker so we have gone some way to mitigate those risks.
TW: So if you buy some of this equity, you register to be a member of Crowdcube to become an investor, you get access to the portfolio of opportunities, and choose your investments, buy the equity, can you sell that equity at some point?
LL: We see liquidity of investments in limited companies as a possible barrier to people investing at the moment. Currently you are very much in it for the longer term – 3, 4, 5 years up until such a point the company reaches a point to either sell, float or there is some kind of management buyout. There is the provision for dividend payment as you would get in any kind of shareholding but you are absolutely right in that at present you can’t sell.
TW: So going down the equity model that presents a lot of legislative barriers, so that must have made setting up Crowdcube a little more challenging than setting up a reward-based model.
LL: Yes it did. We spent over two years developing the model with our solicitors. It was a long and painful process and I guess a lot of people would have probably given up but between myself, Darren Westlake and our lawyers, Ashfords Solicitors, we had the tenacity and will to think that there must be a way of doing this and after numerous attempts we managed to navigate our way through the regulatory requirements and to make sure we are fully compliant and where we can’t be we outsource that to an authorised third party.
TW: Sounds like a tortuous process – when did you actually launch Crowdcube?
LL: We launched February 2011.
TW: So this coming February will be your first full year’s operation?
LL: It will yes.
TW: And how many projects do you think you will have had through by then?
LL: Well we recognised we were breaking new ground and being rather innovative so we were honest in our forecast that we would do one deal in our first year’s trading but in actual fact to date we have done 10 deals and the amount of investment we have raised for small businesses since our first deal in July is more that £2.1 Million. So it really demonstrates that there is an appetite and certainly a need from entrepreneurs for an alternative route to finance. Existing sources are not living up to their billing. Banks aren’t lending, and business angels have become, perhaps rightly, a bit more risk averse as their wealth has depleted somewhat over the past few years. So there was a real need for a new source of finance and there is a real appetite out there for people to invest in good businesses.
TW: So do you see this as a systemic and sustained change in the way that we invest for the future?
LL: We certainly believe so. We see the evolution of crowdfunding into business finance as a game changer and very much the next generation of how small and start-up businesses will raise finance in the future. We have got some big ambitions to take Crowdcube and crowdfunding for equity finance model to a new level as there is certainly the demand and a funding gap.
TW: You have already had some notable successes of course. To use the software developers phrase you eat your own dog food in as much as you raised £300,000
LL: Yes we did – last week we raised £300,000 in 10 days – 162 investors, and to be honest when we were originally developing the Crowdcube model we got an initial seed finding from friends and family and we were acutely aware that actually if there had been a Crowdcube out there at the time we would have used as a method for raising finance and we said at that point if we ever need finance in the future we need to demonstrate our willingness to “eat our own dog food” and do what other entrepreneurs are doing. In fact it was a really enlightening experience to go through it from the entrepreneurs perspective. The roller coaster ride that you embark on, the journey that you go through and the learning and understanding that we have gained from that and the insights to our systems have been really beneficial and we have lots of new improvements lined up for the New Year.
TW: So how easy is Crowdfunding? Kickstarter, who have been around for some time, reckon they have about a 43% success rate, but we get the feeling talking to people entering into crowdfunding projects be they equity or reward based that many of them seem to think that they just have to put up their project up there for the money to start rolling in, so how easy is it?
LL: It’s a good question. At the moment we really stress to entrepreneurs that Crowdcube is very much a platform for them to drive investor interest through their Crowdcube pitch, and the pitch page can list all their information, the business plan, financials and hopefully convert that interest into investment. It’s certainly no panacea by any means and there is effort involved. If you think that you are going to list the business on Crowdcube and all of a sudden you are instantly going to hit a £100,000 target that simply is not the case, unless you happen to have an absolute belter of an idea. So there is still work to be done but we see Crowdcube as a platform that empowers and enables entrepreneurs to target their friends, their family, their customers and suppliers, their existing stake holders, shareholders, communities that they are involved in and driving that traffic. We haven’t reached a critical mass where you simply stick a project on Crowdcube and it will fund, that’s not happened. It’s still very early days, but we stress it is a facility, a platform for entrepreneurs to use.
TW: So if you’re thinking of putting together a crowdfunding project, be it equity based or otherwise, having a plan for that, being aware of the amount of effort involved is an important factor?
LL: Yes exactly. Having an idea about how you are going to drive that interest. One of the things we always ask as part of our vetting process is “How are you going to drive traffic to your site? How will you sign post people? What is your reach? What networks do you have at the moment?” This is really important to us as if they don’t have that reach then they are unlikely to get on Crowdcube.
TW: And does social media factor into that?
LL: Absolutely. Personally I think that there have been a few factors in the last 3 to 5 years that have enabled crowdfunding platforms to accelerate. Firstly broadband internet penetration and speeds have increased; social media and social networking has really empowered and enabled people to push a message out further and faster than ever before and that has really been critical in the success of crowdfunding projects and also the more familiarity and happiness of using micro funding and purchasing on line– using Paypal and other similar payment tools. People are so much more comfortable with that now, whereas 3, 4, 5 years ago there was still a perceived risk.
TW: So what do you think are the common factors in both success and failure in crowdfunding generally?
LL: Firstly, you need a good idea. Be it a creative arts project on Crowdfunder in the UK or Kickstarter. The idea is really important particularly for Crowdcube, the business idea has got to be good. You’ve got to back that up with all that good information that an investor is going to need to be able to make a judgement about whether to invest or not. So you will need a well written well-presented business plan, good financial forecasts. And secondly you need to have a good team behind you, be that the entrepreneur on their own or other people from in the organisation. I always say that the power of crowdfunding is only limited by the entrepreneur or pitch owner and the idea. If you have a great idea and you can push that message out, if you can trigger a viral effect, then there is no end to what you can achieve.
TW: You mentioned there Crowdfunder – what is your involvement with that?
LL: Yes, when we were developing the Crowdcube site back in the Autumn of 2010, the regulatory framework wasn’t quite complete and we weren’t happy with it. So we were at the point we had a crowdfunding platform for businesses but we hadn’t actually launched it. So essentially the principles behind it, the software, the architecture are very similar, so we effectively cloned a site and created a crowdfunding site for the creative arts.
TW: So it’s specifically for the creative arts?
LL: Well not specifically, we don’t limit it any way. But it just so happens that creative arts it works well for them as they tend to have lots of cool funky stuff to give away as rewards for pledging money and that works for people that are interested in that . So that was launched back in November 2010 and it was one of the first UK based crowdfunding sites and continues to be one of the most popular today and we really spent no money at all on marketing it, no money on PR or advertising, it’s purely an organic engine or website because there is a need for it, it satisfies that need and it does it very effectively. So we are really pleased about how it has gone.
TW: It seems that there is an explosion of new crowdfunding sites offering all sorts of niche offerings. What do you think are the implications of that burgeoning of platforms?
LL: I think that’s a reflection of the needs that are out there and the demand effectively and at Crowdcube we welcome the competition. It will only improve the awareness of crowdfunding as a model and method of raising finance and that can only be good for everyone in the industry and help to establish it as an alternative route to finance. It’s the same in any industry, people soon start to tweak things and change things and see new opportunities so niche sites developing are not some much a common thing to occur but an obvious evolution in crowdfunding.
TW: With all the proposed legislative changes in the US – what are the implications for Crowdcube and equity-based Crowdfunding generally?
LL: Well if the changes put forward are approved I think it will have a dramatic impact on the US and probably the rest of the world as well. Crowdcube is at the bleeding edge of Crowdfunding in the UK and certainly leading the way. Now for regulatory reasons the US can’t do it but when that market opens up there is huge opportunity there. And we have certainly been approached by lots of people looking to partner with us and launch in the US and we are very keen to be involved in the US when it does happen because it is a massive opportunity and market. Interestingly we are starting to hear noises from the UK government as well which is obviously monitoring what’s happening in the UK and the US. Vince Cable last week launched a task force to look into how they can help alternative groups to finance small business and he specifically singled out crowdfunding as one of the things that they are going to look into in more detail. So certainly what we are doing here in the UK and the awareness we have generated has rippled right the way up to the corridors of power in government and they are, I’m sure, aware of what is going on in the US as well, so from our point of view it simply reiterates our view that Crowdfunding as an alternative route to finance is going to happen and is going to become big, and quite soon it will not be an alternative route to finance, it will be the route to finance.
TW: And certainly it can sit comfortably alongside other funding models of course. If you run a successful equity-based crowdfunding campaign and then go to another capital market you have got a wonderful asset there to demonstrate the willingness of people to confidently get involved with your product or service and that must be a useful thing to have isn’t it?
LL: Absolutely, absolutely! Businesses that raise money on Crowdcube, are first and foremost raising money, but they recognise that being able to tap into giving customers and people a shareholding in their business and for them to become advocates for your business is really powerful thing and from the social media point of view the publicity and the viral awareness you can create through a crowdfunding campaign can have a really positive impact on your brand and the awareness of your company.
TW: Luke thanks very much for taking the time to speak to us and tell us about equity-based crowdfunding at Crowdcube.