Seed funding is difficult to raise in Europe. Often, very difficult. Though some might say that it should be when a company is only at the idea stage. But that’s a view in stark contrast with Silicon Valley, which is a constant complaint aired by the European entrepreneurs that I talk to.
However, the situation in the UK at least could be about to get a whole lot better with the launch of Seedrs, a platform that aims to crowdfund the gap in “idea-stage” investing by making it easy for anybody to invest from £10 and £150,000 per-startup in return for actual equity. Three years in the making, it’s opening with full regulatory approval — an achievement that rightfully gained the startup many plaudits as it was crowned winner of the recent London Web Summit.
In conceiving Seedrs, founders Jeff Lynn and Carlos Silva, who came up with the idea while studying together at Oxford University, set out to solve two problems. The first is a lack of access to idea-stage capital for entrepreneurs and burgeoning startups.
“Unless you have rich friends and family or have worked in the City for 10 years, finding the first £50K or £75K to build an MVP is the toughest”, says Lynn.
That’s because the startup is too small for VCs and too early for Angels — a familiar story for anybody who has tried to raise early-stage capital in the UK or elsewhere in Europe (and I’ve actually been lucky enough to have successfully done so). Accelerators, on the other hand, help bridge the gap a little but “don’t go far enough”.
The second problem is that seed investing is currently restricted to the 1% of high net-worth individuals due to the relatively steep financial barriers to entry.
“The ‘mass affluent’ — the “2%-20%” — want to be able to invest in startups (due to returns, enjoyment, social reasons or a mix of all three) but can’t do so now because the ticket size is too high. We solve both problems by connecting idea-stage entrepreneurs with mass affluent investors”, he says.
In terms of the mechanisms, Seedrs takes money off the table at two points in the process. A fee of 7.5% is charged on any amount raised through the platform, which is deducted before the balance is transferred to the startup. Therefore, if the fundraising isn’t successful then using the platform doesn’t cost anything. And there is a second charge of 7.5% levied on any returns that investors make above their original investment, whether through the proceeds of a sale, dividends or “other payments from the startup to the investors”. So in a big exit scenario, Seedrs could make a tidy sum.
In return, Seedrs takes care of the administration and holds the shares as nominee. They don’t take a seat on the board, however, but play a role “roughly equivalent to what the leader of an Angel syndicate would, ensuring compliance with the subscription agreement, preventing the company from doing ridiculous things like issuing a million shares to the founders’ friends for a penny each, and so forth.”
For the startups that apply to the platform, there is a vetting process of sorts, consisting of a disclosure review and standard due diligence. “We do not make a business judgment about a startup, and as long as they are pre-revenue, seeking £150K or less and not doing something unethical, illegal or just plain absurd, we want to let them onto the platform and let the investors decide who to back”, says Lynn.
Investors also have to go through an approval process that at least requires them to prove that they know the risks involved with early-stage investing.
“For any would-be investor who does not self-certify as high-net-worth or sophisticated (under very specific FSA definitions), we put him or her through an Investment Authorisation Questionnaire.”
This looks at educational and professional background, and consists of multiple choice questions about the risks involved in investing in startups.
On that note, upon hearing Seedrs’ pitch, my first reaction was not more “dumb money”, to which a few of my Twitter followers responded that even dumb money is better than no money. And of course that’s true, although perhaps I was being a bit too flippant, as Lynn explains.
“There is a view that to succeed as a startup you need to have Dave McClure involved, but we think that’s nonsense – Dave is a great guy I’m sure, but the celebrity cult behind startup investing, particularly at seed stage, is silly.”
Instead, Lynn argues that the advice, support and connections that two-to-three hundred investors can provide is “more valuable than having one or two famous Angels behind you”. And he could well be right.
To that end, Seedrs provides a private page on its platform through which the funded startups can communicate back and forth with their investors. “Beyond that, investors are welcome to reach out to startups directly and offer to get involved however they see fit, and startups are welcome to accept or reject the offer”, says Lynn.
Meanwhile, Seedrs itself doesn’t appear to have had the fundraising challenges faced by the startups its trying to help. Earlier this year the company raised a £1 million investment from DFJ Esprit, Digital Prophets (backed by Luke Johnson and managed by the investors behind 1seed) and “a number of angel investors from leading technical and financial backgrounds.”