Equity Crowdfunding – How Irish Private Investors can Identify Winners

With interest rates at an all-time low, Irish investors are looking for the best ways to get a return on their funds.  Investing in the right private companies can deliver high rates of returns.

Equity crowdfunding makes it easy for small to medium sized investors to buy shares in private companies.

Think of equity crowdfunding as an online version of Dragons’ Den where an entrepreneur is looking to raise (say) €300,000 in return for 20% of their company and ordinary individuals (i.e. the ‘crowd’) can invest anything from €100 upwards.

The crowdfunding platform, such as Spark Crowdfunding, then pools all of these small investments into one large amount to buy the 20% share of the company on offer.

Equity crowdfunding therefore gives small investors access to investment opportunities that were previously only available to angel investors or private equity companies.

Picking Winners

But now that smaller investors are able to purchase shares in these start-ups, how can Irish investors identify the best companies in which to invest?

Here at Spark Crowdfunding, we see dozens of companies every week that are looking to raise new venture funding.  So, we’d like to share with you what are the factors we consider when deciding which companies have the highest chances of successfully raising funds from our database of investors and, equally importantly, what signals or clues emerge from the equity crowdfunding campaign itself that our investors should look out for.

Factors we consider when trying to spot Winners

  1. Management Team

The most important consideration for us is the Management Team and their skills, knowledge, attitude and aptitude.  A good Management Team with a bad idea is better than a bad Management Team with a good idea.  We want to know their track record in business and have they built successful companies previously.  The academic qualifications of the Management Team are also important.

  1. Results achieved to date

We have a greater preference for companies that have actually achieved something, as opposed to a company that says it is going to achieve something.  Specifically, we like to see evidence of demand for the product in the form of Revenues from Sales.  Two investment industry buzz words of relevance here are ‘Proof of concept’ and ‘Traction’.  Evidence of both is preferable.

  1. Amount already invested by Management

If the Management have personally invested money in the business, it tells us they have more to gain by it succeeding and more to lose if it fails.  We take comfort if their interests are aligned with shareholder interests.  The industry buzz term for this is ‘skin in the game’ and the more the better.  For the avoidance of doubt, when we say ‘invested money in the business’, we mean ‘has purchased shares in the company’, not ‘lent money to the company’.  Loans are only of interest if the management is prepared to convert them into shares at the same time as new investors are buying in.

  1. Scale Potential / International Potential

A business has ‘scale potential’ if it can increase revenues exponentially without a commensurate increase in costs.  Tech or digital businesses are more likely to have this feature, whereas ‘bricks and mortar’ retailers tend to have limited capacity and growth potential.  We prefer companies that have ‘scale potential’, especially those with international scale potential.

  1. Use of Funds

The use to which the newly raised funds will be put is another important consideration.  We prefer to see as much of the funds as possible going directly into areas that will generate Sales Revenues quickly, as opposed to building an infrastructure.  Related to this is the length of time before the company stops burning cash and becomes cash-flow positive.  We don’t like to see a prolonged period of cash-burn.

  1. Any Patents or other forms of Protection

We look for businesses that have some protection from competitors or operate in industries with reasonably high barriers to entry.  A Patent can give companies a head-start over the competition, but other equally valuable forms of protection include specialist industry expertise or signed long-term contracts with major clients.

  1. Is the company an Enterprise Ireland Client?

Companies that are clients of Enterprise Ireland tend to have been through a prior screening process and we take some comfort from this.  Equally valuable is a previous investment in the company from an experienced investor, other than a friend or family member.

  1. EIIS approved

Our investors can reclaim 40% of their investment in the form of a tax rebate by investing in companies that are EIIS approved.  Clearly, these companies have a higher appeal to our investor database and are more likely to achieve their fundraising target as a result.

  1. B2C or B2B Company

Crowdfunding investors have the potential to support companies in ways other than just making an investment.  This could include purchasing the product, making introductions to new sales channels or simply offering advice.  B2C companies tend to be more suitable for this.

  1. Exit Plans and Timeframe

Investors in private companies typically look for an exit within 5-6 years and would expect to receive a multiple of the amount they initially invest.  What this multiple is depends on the risk profile of the investment.  For low risk investments a minimum of 3x would be expected while 10x would be expected for high risk investments.

  1. Realism in Financial Projections and Pre-Money Valuation

We understand and appreciate entrepreneur ebullience and optimism more than most.  However, we also need to ensure that the Financial Projections and related Pre-Money Valuation are credible and based on realistic and assumptions.  Companies without a defensible valuation rationale will not succeed in achieving their equity crowdfunding target on Spark Crowdfunding.

These factors highlighted above are what we consider before a campaign goes live on the site.  But once a campaign goes live, there are clues and signals that a savvy investor should look out for, in advance of pledging funds to a campaign.

Signals that emerge from the Equity Crowdfunding Campaign that Investors should look out for

  1. How much is the Management Team investing at the current valuation?

The best proof that Management believe the valuation represents a good investment opportunity is if they are also investing in this current fundraising round.  It is a very positive signal if Management are investing a meaning amount.

  1. How much are other investors investing? Sophisticated Investors or mugs?

The beauty of an equity crowdfunding campaign is its transparency.  Everyone can see how much has been invested at any given point in time.  If others are investing, then the campaign is worth exploring further.

  1. How quick does the Campaign Promoter respond to questions about the fundraising?

Questions arise during every crowdfunding campaign and can range from simple issues, like the number of employees, to more complex ones, like the strategy for international market penetration.  Investors can learn a lot about the CEO of a company, not least his or her communication skills, by the speed and depth of the answers.

In conclusion ………

Picking winners is difficult, particularly with early stage businesses.  But the landscape has changed and through equity crowdfunding, small and medium sized investors can now sit at the same table as the private equity and venture capital investors.

As Ireland’s only equity crowdfunding company, Spark Crowdfunding is democratising finance by creating new investment opportunities for small and medium sized investors.  To receive announcements about Irish start-ups looking to raise funds from Irish investors join Spark Crowdfunding for free today.

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