Crowdfunding: The journey to IPO

By Jean Miller, Equity crowdfunding in the UK has exploded. According to innovation promoter Nesta, equity–based crowdfunding grew by more than 600 per cent between 2012 – 2013, from just under £4 million to over £28 million. A new generation of investors is willing to get behind Britain’s great start-ups and support the brightest and best entrepreneurs in the hope that they will be the next Facebook, Amazon or Google. For those early-stage businesses harbouring hopes of a future market-listing, crowdfunding offers the opportunity to raise finance, grow sustainably and gain valuable experience of working with shareholders which will enable a smoother, more successful, transition to IPO in the long-term. So what are the key factors that your company needs to consider to successfully use equity crowdfunding to navigate the journey to a potential market listing?

Donation versus equity crowdfunding?

The phenomena surrounding crowdfunding has blurred the lines between donation platforms and equity crowdfunding. For many early-stage ventures, reward and donation platforms should be a starting point to test the market and gain initial support for an idea. Donations sites can be a great way of introducing an idea to the market and executed well, could even unleash latent demand for a product or service. Funds raised on reward or donation platforms are typically used to develop the product further or determine market entry. In contrast, equity crowdfunding should be used when your business is ready to start looking for serious investors that can back the company and help it grow in the long-term.

Focus on attracting the right kind of investors

Once you have decided to use equity-crowdfunding then the next step is to attract the support of a few, good quality investors. What’s needed is sympathetic investors that understand start-ups which often require larger funding requirements but have longer time scales to market and the potential to generate high-returns. However, to attract investors you need to create a robust, well-written business plan that includes detailed financials and assumptions. This information can then be used to create a sensible valuation and share structure that takes into account how much money your company will need to raise to meet objectives and how many shares you are willing to sell. We often work with companies that are wary of adopting shareholders. However, by drafting a strong business plan, your company will be more successful in attracting the support of investors who can provide sound advice on achieving future growth and add real value to your business.

Think about the future

By raising money on an equity platform, your business is essentially exposing itself to the market and increasing awareness for your brand in the public domain, laying the foundations for a successful market listing. As a result, you need to be serious about growing the business and recognise your responsibility to deliver a return to stakeholders. It’s also important to remember that your company will probably need another round of follow-on funding or growth capital at a later stage. As a result, good corporate governance is key. Once you have raised finance, keep investors updated on your performance by regularly communicating how the company is performing and any revisions to your company’s financials or assumptions. Ultimately, equity is serious finance and executed properly through a professional crowdfunding platform it should take your business through a process that helps you learn how to create a compelling pitch so that you can benefit from the experience of sophisticated investors. It should also help you lay the groundwork to create good corporate governance structures that help your company transition from focusing on growing revenues to forming the basis of durable business models capable of supporting a transition to IPO in the future.   Jean Miller, is CEO of InvestingZone, the equity crowdfunding platform which has been used by Rockstar, Rezatec and Organic Foods Limited to raise investment.

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