Crowdcube: Luke Lang and Darren Westlake
Fresh from raising £1.5m Crowdcube's Luke Lang talks growth and responds to critics of the business model
If you’ve raised finance the traditional way you’ll know it can prove a big, bad, and dangerous distraction.
Months of meetings that go nowhere, some positive introductions, a lot of learning, and if you’re lucky someone bites and you get the vital capital you need for the next phase. All the while you’re trying to keep the business upright.
Or you could be Luke Lang and Darren Westlake, founders of Crowdcube, who this month raised £1.5m in a deal so rapid it was being confirmed two days after an email went out titled ‘Your chance to invest in Crowdcube Limited’. A case of the early bird catching the worm.
Admittedly, there were a couple of other factors. On Tuesday May 7, when Darren Westlake’s email landed in interested parties’ inboxes, it contained confirmation that existing investors had already followed-up with £500,000 of the total. A US-based institutional investor had also committed another £500,000.
The target from follow-on investors though had been reached in just two days. The third day was Wednesday May 8. The press release reached the media’s inboxes on the Thursday. As fundraising timelines go, Usain Bolt would have been left in his blocks.
Those that have had the rites of passage fundraising experience will no doubt feel a little envious. Authorised by the Financial Conduct Authority, a very recent successor the Financial Services Authority incidentally, Crowdcube users – including the company itself – have raised in excess of £8.2m via its platform, with the company taking a 5% cut.
By the time you read this it’s highly likely more than 50 companies will have successfully fundraised from more than 34,000 investors since it launched in 2011, with the site closing its first £1m deal for bar operator Rushmore Group that same year.
Such rapid progress in the nascent space encouraged us to name Crowdcube in 11th place in the Startups 100 last year. If you’re staggered by such figures, don’t be – impressive as they are. This, believe Lang and Westlake, is the tip of the iceberg.
As Crowdcube’s own deal shows, crowdfunding is only getting bigger, faster, stronger, which is why the pair felt empowered to introduce a £250 listing fee and a £1,750 charge for legal fees on successful deals in addition to the 5% cut. We caught up with Luke Lang, to discuss the astonishing deal, crowdfunding models, and the company’s plans for growth.
Why do you think it was you were able to achieve the fundraising so quickly – what in particular was behind the momentum?
We initially made the share offer available to our existing shareholders as we felt this was right and wanted to make sure that they wouldn’t miss out. We were taken aback how quickly our initial target of £250,000 for existing shareholders was reached – it took just five hours – with £500,000 reached the following day.
This put us in a very strong position when we made the pitch public as we’d already secured a large proportion of the target amount and had all important momentum behind the pitch.
I gather you plan to use the money to increase the size of the team, launch an awareness building marketing campaign, and to expand internationally. What more can you tell us about each of those?
We’re a pretty small team at the moment and need to grow to keep up with demand, which has really accelerated since the turn of the year.
We want to continue to have not only the best crowdfunding platform in the UK but one of the best in the world, so we’ll be investing heavily in software developers. We’ll also be building the team to support entrepreneurs in getting investment ready as well as our investor community.
We’re not complacent; we want to grow and expand rapidly over the next 18 months and marketing and PR will be a key part of realising this ambition.
We’ve already launched a joint venture partnership in Sweden, with Brazil, US and Canada not far behind. We’re also in talks about entering a number of countries in Europe and the Far East and Australasia.
What are your expectations for growth? What have you promised investors?
We haven’t promised our investors anything. Nothing in life can be guaranteed; we make no bones about the risks of in start-up and early stage businesses. It’s a fact of life, and particularly so in such a nascent market as equity crowdfunding.
That said we’re in a fantastic position right now at the forefront of the industry and we’re quietly confident that we can deliver a healthy return to our shareholders over the coming years.
Your revenues, as I understand it, are 5% of the £8.2m raised so far (so £410,000). What plans have you got for additional revenue streams – particularly recurring revenues?
We’re looking to develop additional functionality and features for investors that will form part of a premium service for regular users.
The sheer volume of businesses that pass through our systems also means that there will be opportunities for further revenue streams on that side too. However, in such a dynamic market nothing is set in stone.
Is the 5% success fee model sufficient to sustain it as a significantly larger business?
Our aim is to be raising tens of millions of pounds for hundreds of businesses each year. At this scale things start to make more sense. Further monetisation of our model for both businesses and investors should not be a problem.
Will you retain ownership of any international platforms or are you looking to provide the technology platform on a joint venture or franchise basis?
It is likely that our international expansion plans will be based on joint venture partnerships.
We’ve heard anecdotally from one company that raised finance recently that they opted to use Seedrs over Crowdcube due to complications over investor ownership. With Crowdcube each individual investor is an investor so ownership is diluted, whereas Seedrs makes the investment on the crowd’s behalf so counts as one investor. I’m told the Crowdcube model could make things difficult when companies look to raise future rounds. Is this something you have plans to address?
Investors, whether through Crowdcube or Seedrs, may experience dilution if a company raised a future round of funding; this is a fact of equity finance.
At Crowdcube, we allow some qualifying investors to benefit from pre-emption rights, which mean that any future fundraising must be issued to these shareholders first so that they can protect themselves against dilution by investing in a following round if they wish. This is expected amongst business angel investors.
It is a myth that venture capital firms will not invest in crowdfunded businesses. For instance, George Whitehead from Octopus Investments, one of the leading venture capital firms in UK, was posed this very question recently during a panel discussion involving both Crowdcube and Seedrs at The Great British Private Investor Summit 2013. His response was emphatic and he sees ‘no issue with having numerous investors for future VC investment’.
Crowdcube also has good relationships with a number of venture capital firms, including Ariadne Capital which actively refers businesses through to Crowdcube with a view to them providing follow-on-funding once they’re more developed.
We also had the CEO of a well-known UK venture capital firm invest in Crowdcube personally during our recent crowdfunding round. It is a great opportunity for venture capital firms as equity crowdfunding is going to provide a whole new generation of great businesses where they have already financed the high risk early stages of their business development and may need VC funding further down the line. It is ludicrous to think that they’d be against this.
Could you give fundraising companies the option? And will you?
Right now the research, which we recently conducted earlier in 2013, shows overwhelmingly that investors want to become direct legal shareholders in the companies they invest in.
41% stated that they preferred direct ownership compared to a mere 15% who would like Crowdcube to offer a nominee structure; the majority, 44%, had no preference. We’ve always believed in giving people want they want.
It is really important to remember that equity crowdfunding for many is as much an emotional investment as a financial one and people love the fact that they have a tangible connection to the company and a share certificate once the deal is completed.
We raised nearly £1m across four different businesses in April and we’re likely to exceed £2m for another four companies in May, including ourselves. This clearly demonstrates the popularity of Crowdcube’s model when compared to others in the market.
Are there advantages to structuring the deals in this way in terms of protecting investors?
All our deals are completed by a reputable legal firm to ensure that corporate governance for the funded firms is high; the appropriate resolutions and waivers are signed and the shares are issued in line with due legal process.
Using our model, as an investor, you may receive voting and pre-emption rights in a business that you invest in. This is what business angels expect and would not accept anything less. We have many thousands of investors who have self-certified themselves as either a high-net worth or sophisticated investor.
This combined with the large deal size and average investment amount demonstrates that we are attracting traditional business angels with large pots of money to invest as well as a new breed of ‘armchair Dragon’ with more modest reserves for the purposes of equity investment.
What’s more, there are no investment fees, either upfront or when the company exits – it’s their money, their risk and their reward.
What else might we see from Crowdcube as the business evolves? Are there plans to generate recurring revenues from investee companies paying a subscription for Crowdcube to automate its investor relations?
Absolutely, there are lots of opportunities to offer registrar services or other business support services. We are also conscious that the crowd has a tremendous wealth of expertise and experience that could be used more effectively for the businesses.
You’ve said to me you have an enormous list of ideas to work through. Are there any you can talk about yet for the next phase of growth?
We’re brimming with great ideas to improve the platform but you’ll have to register on Crowdcube.com to find out when they are launched.