So you want to fund your startup. You got a genius idea and a sturdy business plan, but you’re not ready to face a VC panel, have no time to meet investors individually, or you want an alternative to crowdfunding? Then crowdinvesting might be just the thing for you. But before we catch up on the latest trends, let’s get some basics straight.
Last week we talked about the several kinds of crowdfunding. Technically, the so-called equity-based crowdfunding also applies to crowdfunding, but for reasons of understanding and disambiguation, the expression crowdinvesting is being used, which again, is by its core a different form of financing.
With crowdfunding (be it donation-, reward-, or perk-based), funders get some kind of thank-you goodie for their contribution. In crowdinvesting the incentives are different: Here, the investors obtain a small stake in the company in exchange for the money they put in. Or in other words, they become a shareholder. This means they have a say on certain decisions, they are entitled to dividends and get a share of the value in the company when shares are sold. Crowdinvestors are economically connected to the venture. No need to say that one also takes the risk that the company might fail. But as far as the expected startup succeeds, benefactors get to share in a piece of the pie.
“We still have an equity gap in Europe when it comes to funding for companies at early stages,” Joschka Rugo, head of public relations for the German crowdinvesting platform Companisto, told inventures.eu. It is very difficult to get capital from banks, particularly for younger entrepreneurs without previous experience or own capital, he explained. Here, funding via crowdinvesting can be crucial for startups, as they need venture capital for further financing. Additionally, crowdinvesting platforms tend to support projects with marketing and PR, media attention, free brand ambassadors, new (loyal) customers and direct feedback from the crowd.
Who is the crowd?
“In Austria, we see that investors are mainly male, on average above 30 years and with a higher education,“ said Daniel Horak, co-founder of the Austrian crowdinvesting platform CONDA. Also, there are two groups of crowdinvestors: On the one hand, there are those who expect an interest out of their investment. On the other, the second group invests due to emotional reasons – a relation to the founders, anticipation for the product or service, or local background.
Perhaps CONDA’s most successful project to date is the innovative low-carb beer NIXE, which managed to raise 150.000 euros within a few weeks. According to Horak, the reason for it was “a combination of a highly interesting and easy to understand product, and the effort of the startup team itself.” To make your crowdinvesting campaign as successful you need to activate a community, he added, and encourage them to get involved in your common project.
Clearly, a successful crowdinvesting campaign means new, and more, shareholders onboard a venture. Based on their own contribution – in the case of CONDA between 100 and 3.000 euros per project, and on the startup’s success in the future, investors get a percentage of the profit. It is paid once at the end of each year, which is also when they have the opportunity to drop out of a project – under certain conditions. More information is also available in our previous report here. In contrast, Companisto has a minimum holding period of eight years, which makes it crucial for investors to fund a startup they really believe in. Just like with CONDA, each investor’s share is paid out once a year, yet the duration of the commitment is much longer.
What do you need to know as a startup?
Though crowdinvesting principally seems rather simple, caution is advised when planning to run a campaign: There are several details to be respected and legal issues to be adhered to. For instance, there are crowdinvesting campaigns where the capital-raising venture must succeed in raising the exact amount – or more than that – outlined at the beginning of the campaign or they don’t receive any funds at all. The way CONDA operates is, in case a project is not funded by the original deadline, the platform may allow for the time period to be extended by another 35 days – as long as these terms have been agreed upon in advance. If the target is not met the second time around as well, the campaign is deemed unsuccessful, and all investors get their money back. Read more about it here.
Companies that raise money through CONDA have to pay a 7,5 percent success fee once their target has been met; additional costs may occur should a startup choose to make use of CONDA’s communications or mentorship programme. Companisto, on the other hand, finances itself by means of a purely success-based commission of ten percent of the pledged funds. What seems quite convenient is the fact that startups do not bear any administrative burden; instead, Companisto pools the shares and handles payment processing. Similarly, CONDA takes over most of the administrative expenses that result primarily from the communication with the crowdinvestors.
Companisto and CONDA, however, are far from being the only players in the crowdinvesting scene. Green Rocket, for example, is the first crowdinvesting platform in Austria, which specialises in sustainable businesses in the fields of energy, environment, mobility and health. Austrian 1000×1000, on the other hand, also offers crowdinvesting as an option, although it combines it with crowdfunding under one roof.
Crowdinvesting in the Europe-wide context
Last week, Companisto just cheered on a historical step: The team behind the German platform opened their first international office in Zurich, while only a month ago they announced their expansion across Europe. Offering a cross-border platform comes with its challenges, perhaps the largest of which being to “obey the different laws in each European member state”, said Rugo. With both Companisto co-founders – David Rhotert and Tamo Zwinge are both lawyers – the team seems well prepared to tackle the difficulties. Yet how they do it remains a secret.
About a month ago, CONDA, on the other hand, celebrated their first birthday and what seems to have been a successful year: The team managed to gather around 500.000 euros for their ventures. Do they plan to expand to CEE as well? Yes and no, said Horak: “First of all we are aiming to settle our market leadership in Austria but we are already looking to CEE countries and getting feedback if crowdinvesting could be useful.”
From what it seems, crowdinvesting is just starting to become more and more popular among the public. Make sure you get your piece of the pie!