BGF explains: What is equity crowdfunding?

Equity crowdfunding is a form of equity financing in which shares in the business are acquired by a large group of investors, who each typically put in a relatively small sum.

Equity crowdfunding has benefits but it may not be the right choice of funding for all businesses. What exactly is it, how does it differ from more traditional forms of equity financing, and is it the right method of financing for your business?

What is equity crowdfunding?

Equity crowdfunding, like other forms of equity financing, involves offering part ownership of a business in return for funding from investors. Where crowdfunding differs from other forms of financing is that it involves a large group of investors who each typically invest relatively small amounts. This group is known as the ‘crowd’ and generally includes a broad range of investors. They may include traditional investment firms but are more likely to be made up of members of the public who want to back an innovative new product or idea.

Equity crowdfunders typically invest through online platforms. The size of individual investments vary but are usually much smaller than those seen in traditional forms of equity financing. Because investing carries risk, these platforms are usually regulated by bodies such as the Financial Conduct Authority.

Why do businesses seek equity crowdfunding?

A common hurdle for businesses seeking conventional forms of equity financing is finding an investor willing to meet their funding needs. A multimillion-pound investment is a substantial commitment for a single investor. Crowdfunding offers an alternative model which presents smaller-scale investment opportunities to a much larger group of investors. If the proposition of the business is exciting enough, this method can make it easy to reach the funding target.

Equity crowdfunding can provide the business with a base of engaged investors who have an interest in the business. This may be useful for marketing purposes. The investors can provide businesses with a wide base of support to scale and grow, which can be especially beneficial for small and start-up companies.

Is equity crowdfunding right for everyone?

Equity crowdfunding can present complications for certain businesses. Having a large number of small investors, rather than one or two large ones, potentially introduces complexity that can be challenging to manage.

Equity crowdfunding can also result in weaker investor relationships when compared with other forms of equity-based financing. Investors of traditional equity funding can offer years of experience, expertise in their field, and industry connections. Investors on crowdfunding platforms may be individual members of the public without experience or specialist knowledge.

Businesses should also consider that the visibility that comes with crowdfunding can offer drawbacks as well as benefits. Should the business encounter obstacles, or miss its growth targets, investors on a crowdfunding platform may be less patient than traditional equity investors. Enthusiasm can quickly turn to frustration among an investor base that has not cultivated a long-term mindset.

BGF: a different kind of investor

Understanding the right form of investment is vital for a business that wishes to scale operations without jeopardising its culture and ideals. For start-ups or established businesses looking to take the next step in their growth, it is crucial to find the right investor, which is where BGF comes in.

We are a different type of investor. We only ever act as a minority investor, meaning existing shareholders and management teams retain control over key decision-making and growth planning. Our “patient” capital approach is different to traditional private equity because of its flexibility and the trust we put in the management teams we partner with. We’ve backed more than 450 UK and Irish businesses over the last decade. As well as finance, we offer expertise and resources through our vast Talent Network.

Learn more about how we could propel your business to the next stage in its growth journey by talking to our team today.

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances.