A lot of people might get bright ideas while they’re watching television, but it took U.K.-based entrepreneur Darren Westlake to actually take action on one and as a result launch the world’s first equity-based crowdfunding Web site.
Westlake was watching Dragon’s Den (the original British version) at his home and was taken by one of the presenting entrepreneur’s ideas. None of the dragons would bite on an investment, and Westlake reflected that if only he had $80,000 he’d invest. But then he wondered if other people watching the program might not be thinking the same thing, and that maybe 1,000 people could get together to invest in the firm. So the conceit behind Crowdcube was born.
Crowdcube addresses a simple supply and demand problem, Westlake says. There’s a lot of businesses that need money and not enough angel investors out there to fund them. So he decided to lower the bar by making it possible for an average person to invest a small amount of money in a startup firm.
“What if anybody could become a business angel?” he asked himself. Westlake spoke to a Toronto audience at IT World Canada’s Technicity event last week.
Looking to the micro-financing site Kiva, and impressed by the success of Pebble’s smart watch product on perks-based crowdfunding site Kickstarter, Westlake set out to create an equity-based crowdfunding site in the U.K. Rather than just get the promise of a future product, investors would actually own a stake in the firms they were funding.
“The process of allowing anyone to sign up to invest in a company needs to be clean and quick,” he says. “Crowdfunding is a completely different way to look at raising money.”
Equity-based crowdfunding isn’t legal in Canada, and many other areas of the world because of securities laws that require investors to be licensed and companies selling shares to produce rigorous and costly legal documentation. There were similar problems in the U.K., but Crowdcube’s legal team came up with a clever way to ensure the funds could be raised legally.
All the companies that raise money on Crowdcube technically become subsidiaries of Crowdcube. All the investors also become officers of Crowdcube. Since all the investment is within the same corporate body, it is allowed under U.K. law. Crowdcube charges its member firms a five per cent fee of all the funds raised. If a firm doesn’t hit its target, no money exchanges hands.
Westlake shared what Canada can learn from Crowdcube’s example and about the other challenges of operating an equity-based crowdfunding platform. Click on the embedded video to watch the full interview.