Crowdfunding, or peer-to-peer lending, has gained immense popularity over the last few years as an alternative way for SMEs to raise capital. It’s easy to understand why when crowdfunding removes banks from the picture, generates funds fast and doesn’t require any upfront costs. The only hitch for a long time was that amongst the many crowdfunding platforms out there, not one helped Irish SMEs to raise equity. That was until Spark Crowdfunding entered the market.
An alternative to angel investors
The ability for Irish SMEs to raise equity is very limited. If you’re a bigger company, you can approach the wide market of corporate financiers, but if you’re below a certain level, you are very restricted in what you can do. Up until now, crowdfunding in Ireland has been primarily enabled by Linked Finance and GRID Finance, but both of these platforms provide loans – equity doesn’t get a look in. As any entrepreneur reading this will know, great businesses aren’t born from earthshattering, completely original ideas but rather by providing a solution to an existing problem or by entering a gap in the market. When Chris Burge founded Spark Crowdfunding, he managed to do both.
Spark Crowdfunding is a new crowdfunding platform in Ireland solely focused on helping companies raise equity. They’re doing a good job of it, as well. They recently raised €275,000 in equity for Fleet at 20% of the business. In fact, Fleet was oversubscribed because €384,000 ended up being raised. Their highest single investment from one investor was €55,000 which would suggest there are high net worth individuals already using the platform. You can see why they caught our interest, so let’s dig a bit deeper…
Who is Spark Crowdfunding for?
Spark Crowdfunding is most applicable to young companies and start-ups that want to sell 5% – 10% of the company. Right now, Spark Crowdfunding is attracting many High Potential Start-Up (HPSU) companies, Enterprise Ireland clients looking to scale with further funding. To date, they have a 100% success rate raising equity for companies.
How does equity crowdfunding work?
We spoke to Chris in October to find out more about how the process works. He explained that Spark Crowdfunding helps to put a valuation on your company. The way it works is that the company itself sets the valuation and decides how many shares or what percentage of the company is for sale. Spark Crowdfunding will then make sure the valuation isn’t wildly out or overly optimistic before posting the campaign to the website.
If people ask for too much the market will decide against them anyway, but, as Chris explained, they want campaigns to be a success for companies as well as investors, so they make sure to filter out inappropriate offers. Once the campaign is live, it will then either be filled within the set time period by investors on the crowdfunding website, or it won’t.
Even though there could be a large number of investors for any single crowdfunding campaign, Spark Crowdfunding will group them into one nominee company which goes on the share register of the company that is looking for the investment. So, in the end, you are left with just one shareholder for all the investors on Spark Crowdfunding.
There is no negotiating; this is not Dragon’s Den! The amount and the percentage of shares asked for doesn’t change. You’ll also be happy to hear there are no hidden fees. Spark Crowdfunding’s income model is to charge 6% on the equity raised for any one campaign.
From the investor’s perspective
Crowdfunding relies on investors – and investors only – backing something they think will make them a profit. That’s why Spark Crowdfunding prioritises protecting investors as much as it can. It’s important to guard against people wanting to post outlandish schemes, and Spark Crowdfunding recognises that it has a responsibility to uphold a positive reputation for the future of equity crowdfunding in Ireland.
As with any investment, there is the risk that you may not make any money. You may even lose money. In general, the best way to approach P2P crowdfunding is using the venture capital model which supposes that if you invest in 10 companies, 5 will probably fail, you could break even on 1, double your money on 2, and 2 might end up being successful. The result is that overall you’re ahead, but some companies will fail.
There isn’t a secondary market provided on Spark Crowdfunding, so investors can’t resell their shares back on Spark Crowdfunding. There are three ways an investor can exit. There might be an IPO of the company, in which case the investor will receive the market rate for the shares or the launch price of the shares. There could be an MBO, where the management team buy the company. However, the most likely event would be a trade sale, where another company takes over the entity. In this case, the investors will be paid out.
How to register your company with Spark Crowdfunding
There are a few things you need to do to register your company for equity crowdfunding. You will need a campaign video to capture investors’ attention and convince them to back you. Then there is a pitch deck, which is a part of the Spark Crowdfunding process for checking the company’s viability. There will also be some basic due diligence required. You don’t necessarily require a trading record, but it is worthwhile to note that if your business is just in the idea stage, it may not get the go-ahead internally at Spark Crowdfunding.
It’s good to see a platform that finally responds to the problem of raising equity for small Irish companies, and we look forward to seeing how this works for both companies and investors. If you’re investigating the best way to raise money for your business, take a look at our blog about P2P lending and other alternatives to bank loans. It’s one of our most popular articles!
If you would like to talk to someone about your company’s financial health and what type of investment is right for you, book a free health-check by calling 01 639 2963.