Equity crowdfunding

Equity crowdfunding is a type of equity finance whereby people (‘the crowd’) invest in an early-stage unlisted company, in exchange for shares (equity) in that company. Individual investors thus become shareholders and stand to profit if the business does well – they might also lose some or all of their investment. Equity crowdfunding usually takes place over an online platform.

With a good crowdfunding campaign you can access potentially millions of people via one of the many crowdfunding sites.

If an Australian business opens a branch in UK, individual investors who put money into your business can offset some of the risk involved with investing in early-stage companies via two government tax relief schemes – the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

You might also want to consider debt crowdfunding – more commonly known as peer-to-peer-lending (P2P) – or other types of equity finance such as angel investors (business angels).

What are the benefits of equity crowdfunding

The benefits of equity crowdfunding include:

• Access to capital: Allows businesses to raise funds from a large number of investors, providing access to capital that might not be available through traditional financing methods.
• Market validation: Attracting a broad base of investors can validate your business idea and demonstrate market interest and demand.
• No repayment obligation: Unlike debt financing, equity crowdfunding does not require repayment of funds or interest payments, easing cash flow pressures.
• Public exposure: Campaigns can increase public exposure and awareness of your business, leading to potential media coverage and heightened visibility.
• Flexible terms: Offers flexibility in terms of how much equity you are willing to give up and allows you to set the terms that best suit your business needs.
• Increased credibility: Successfully raising funds through equity crowdfunding can increase your business’s credibility and attractiveness to future investors or partners.

What are the cons of equity crowdfunding?

The cons of equity crowdfunding include:

• Reduction of ownership: Raising funds through equity crowdfunding means giving up a portion of ownership in your business, which can minimise your control and decision-making power.
• Disclosure requirements: You must give detailed information about your business, including financials and growth plans, which could be accessible to competitors.
• Time and effort: Running a successful crowdfunding campaign requires a lot of time and effort in planning, marketing, and engaging with potential investors.
• Regulatory compliance: There are legal and regulatory requirements to meet, which can be complex and costly to navigate.
• Risk of failure: There is no guarantee of success, and a failed campaign can negatively impact your business’s reputation and future funding chances.
• Pressure for quick results: Investors may expect quick returns on their investment, which can pressure the business to deliver short-term results rather than focusing on long-term growth.

What are the alternatives to equity crowdfunding?

Alternatives to equity crowdfunding include various other funding options that businesses can consider:

• Bank loans: Getting a loan from a bank or financial institution. It requires repayment with interest but does not reduce ownership.
• Personal savings: Using personal funds or savings to finance your business, which avoids debt, but involves personal financial risk.
• Friends and family: Raising funds from personal connections who are willing to invest in your business, often with more flexible terms than other investors.
• Grants: Applying for business grants can provide funding without the need for repayment.
• Peer-to-peer lending: Borrowing money through online platforms that connect borrowers with individual lenders, often with competitive interest rates.
• Strategic partnerships: Forming partnerships with other businesses or organisations that provide funding in exchange for a strategic partnership or future benefits.

Each of these alternatives has its own advantages and considerations, and the best option depends on the specific needs and circumstances of your business.