Interviews

The three things equity crowdfunding investors look for

6 min read

04 December 2014

More crowdfunding campaigns online means more competition for funding, and the investors providing it. So what sets apart an entrepreneur and their pitch?

Crowdfunding equity investors say there are three main factors in picking investments; the strength of the idea, the documentation and research that backs it up, and the personality of the entrepreneurs behind it. That means startups looking to secure investment need to ensure they present the business in the right light and are available to provide additional information.

The first stage investors go through when trying to examine possible investments tends to be looking for strong ideas. “What inspires me to invest first of all is seeing something and thinking ‘that’s a great idea’. It’s the product and the ethos that’s more important than anything,” said Christine Lomax, a London-based business advisor who’s invested in four companies through Crowdcube.

Julian Bennet invested in crowdfunded equity projects while studying for an MBA in the US. He revealed he invested in Escape the City, which helps professionals transition between different careers, because it was an idea he believed in and a service he’d used before. The campaign raised £600,000 for a 24 per cent stake in the company.

The difficulty of starting a business means personality’s an important factor for investors. Rupa Ganatara, co-founder of online men’s grooming retailer Yes-Sir.com, who has backed entrepreneurs through Crowdcube, Funding Circle and directing investment, commented: “Great business ideas come and go all the time, but you need to be able to feel you have found an entrepreneur that can execute the business plane; it’s about the founder.” 

Peter Hall, a software developer who has backed five food and drinks businesses through Crowdcube, added: “I’m not only looking for return on the investment; I want to feel like it’s a personal relationship, so the history of the people involved is important too. I like the entrepreneur to be enthusiastic, with real background experience of the industry – this means they’re more likely to be successful and follow it all the way through. The video gives you a real idea of the person.”

Part of the process of judging the people behind the idea is looking at the video for the campaign and the documentation. However, investors often contact entrepreneurs to find out more information through a face-to-face meetings, email or on the forums and, as Real Business noted recently, the process of meeting invest is a crucial part of marketing a campaign

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The exchange of information with investors goes both ways and many investors share advice with the entrepreneurs they’re investing in. “You get to keep in touch with the founders, so you feel a part of the business. There’s sometimes an opportunity to get more involved, to contribute advice and opinions on strategy, for instance,” said Bennet

Each of the investors mentioned in this feature highlighted the importance of doing your research and making sure you understand the financials before making an investment. Bennet told us it’s important to cover everything from revenue down through costs all the way to the net income and any debt that exists.

Those seeking investment need to make sure these details are available and that they are available for questioning if anything else is needed, a point Lomax highlighted when talking about what she looks for in a business. “They should have a very transparent business plan and cashflow, with a good attention to detail – the figures have got to stack up, so do your research [as investor] behind the scenes.”

While the strength of idea, the research backing it up and the personality of the entrepreneur were highlighted as the most important factors for crowdfunding equity investors, the valuation clearly plays a key role.

“The business has to be offering enough equity in return for the investment. If I’m going to invest £10,000 and end up with 0.03 per cent of a business that isn’t already well established that can be hard to justify. The valuation also has to be realistic,” said Hall. 

The process of researching a project and getting to know entrepreneurs has become more difficult because of the speed at which they’re being funded. A number of projects on Crowdcube and Seedrs have reached their targets within 24 hours this year, although some raise additional funding to meet demand.

“Now that companies can be funded the same day, I might miss that fundraising round. However, you need to sleep on it, process, and do your homework,” advised Ganatara.