Crowdfunding has become increasingly popular over the past decade, yet it has been with us for centuries. The Statue of Liberty in New York and the Czech National Theatre are both examples where communities funded an idea or a project. The latest innovation in crowdfunding is crowdinvesting, which allows investors to invest in and own a share in a privately held company or real estate.
While equity crowdinvesting has already been developed in markets like the UK and USA, the possibility to buy a share in a company that investor likes or believes in is new to Central and Eastern Europe (CEE). Platforms such as Conda, Crowdberry or Fundlift allow private investors to become a part of a company and companies can gain capital for growth, attract new customers or brand ambassadors and even attract new talent to the company.
Private investment and co-ownership actively supporting value creation
In winter 2016, Tomas Zacek, co-founder of the self-sustainable micro-home Ecocapsule met 20 potential investors at one of Crowdberry’s investor events at Tatra banka Private Banking. He presented his vision, persuading them to invest in it and to become a part of his company. Already back then the idea behind Ecocapsule and its iconic design were resonating across the world and company was receiving hundreds of order inquiries. At that time, Tomas only had four colleagues and almost no budget. He was not eligible for bank financing, and it was also too early for an investment fund.
In what has become one of the largest crowdinvesting campaigns in the CEE, Ecocapsule, being among the most innovative companies in Slovakia, accepted 11 private investors as new co-owners. An investment totalling 750,000 euros enabled the company to produce first pieces of the world-renowned, self-sustainable mobile micro-house. Some of the investors also supported the company on its path of growth by helping with sourcing components, development, distribution in Southeast Asia and identifying suitable factory locations and potential clients.
In January 2018, they all watched together Slovak journalists observing the first Ecocapsule during Ecocapsule’s world premiere on the roof of the UNIQ building in Bratislava’s city centre.
The second investment round, launched in June, will be used for serial production and was still open for new investors at the time of writing. First round investors are already seeing an valorisation of their initial investments and are also participating in the second round.
With 2.75 million euros from dozens of investors in two investment rounds, Ecocapsule’s funding story best signifies what equity crowdinvesting is about. Investors become a part of the company’s entrepreneurial story and are able to actively engage in improving the value of their investment if they wish to do so.
Wide range of investment segments
Crowdfunding in the modern era initially supported start-ups, mainly by funding the development of new products. Crowdinvesting as a discipline has evolved within crowdfunding for investors who did not want to just buy a single product (which needed to be developed in the future) but rather to purchase a direct stake in the company.
From high-risk, high-return start-up ventures, crowdinvesting has branched into other investment areas such as small and medium-sized enterprises (SMEs), real estate and even artwork. This diversification offers investors the opportunity to allocate capital and choose investments with various risk-return profiles, with real estate being considered the safest, SMEs relatively less risky, and start-ups being the riskiest.
Debt crowdinvesting platforms developing in the CEE region are mainly focusing on real estate projects (Upvest and Fundlift – CZ) or SMEs (Fingood – CZ, Finnest – AT).
Investors looking for true ownership can turn to equity crowdinvesting platforms, such as Crowdberry or Fundlift, where they can buy shares in real estate, SMEs and as well as in start-ups.
An example of an SME investment is CreativePro, one of the world’s leading live marketing agencies operating in the CEE, originating from Bratislava, Slovakia. In 2017, the company raised capital from investors who also add value by helping the company grow, mainly in the Czech Republic, Slovakia, Poland, Hungary and other CEE markets. Investors in this company have recently been paid out their first dividend.
Another example of the variety of investment opportunities that crowdinvesting offers beyond start-up investments is a project called “Dúbravská oáza”, a high-quality retirement facility for senior citizens with a need for continuous care. With a scenic location in the woods of Bratislava, the facility combines the features of a SME together with a strong real estate component with the land and buildings offering investors increased security.
This case is an example of a crowdinvesting campaign that offers co-ownership in real estate valued at over 5 million euros. The ability to purchase a direct equity stake in such an extensive project makes it the first opportunity of its kind in the region.
Crowdinvesting versus publicly traded stock
Similar to trading on public stock exchanges, investors holding shares in private companies acquired through crowdinvesting expect to achieve their returns from investments into SMEs in the form of dividend payments or share buybacks and value appreciation at the time of exit or sale to another investor from investments into start-ups.
However, private investments are usually not as liquid as publicly traded stock, especially those into start-ups. Investors therefore cannot sell their shares simply and quickly and risk losing the total investment. The returns, on the other hand, if the company is successful, are high and usually in multiples of the original investment.
One of the most famous examples of equity crowdinvesting is BrewDog from the UK, which is a small British brewery that expanded globally to become one of the fastest growing food and beverage companies in the UK. BrewDog received funding through the CrowdCube platform, and its first investors earned 28 times their original investment.
Co-ownership through equity crowdinvesting is very different from crowdfunding using debt instruments, where investors lend money and become creditors. Usually, investors do not engage in creating value in the company, their priorities are interest payments on loans or bonds. However, debt instruments are easier to understand and comply with much simpler regulations compared to equity investing and generally bear less risk, which, on the other hand, translates into lower returns.
Equity crowdinvesting over the lifetime of a company
Expanding into new markets, developing a new product, increasing manufacturing capacity or even expanding the team in today’s competitive environment is challenging. All these challenges require, at some point in time, external funding to support and assist the company in becoming a globally successful business.
Equity investments, either private or from a broader crowd, strengthen the balance sheet of a company, whether it is a start-up or SME, and enable initial losses to be absorbed by revenue from activities that follow later.
Strengthening the balance sheet of a company on the equity side makes a company look healthier to banks and provides access to initial or additional bank financing. Equity crowdinvesting should thus be seen as complementary to traditional bank financing.
When seeking private equity investments, companies usually turn to business angels, venture capital or other investment funds but increasingly also to the crowd via crowdinvesting. Over the lifecycle of a company – start-up or SME – crowdinvesting tends to follow first financing by family members and friends and is followed by or comes concurrently with investments from the first institutional investors (venture capital funds).
For most crowd investors, financial returns are only a part of their motivation to invest. Generally, the choice to invest into selected companies is a combination of emotional engagement, social influences and financial returns. Through crowdinvesting and the active support of investors, a company often not only gains financial capital but also new customers, suppliers, team members or advisors, all of which are benefitial for further growth and success.
Not only online
Most of the platforms focus on providing investments from a larger crowd of rather small investors (e.g., Crowdcube, Seedrs, Fundlift, Conda). They work mainly online with automated processes focused on user friendliness, intuitive and simple collection of information. Users can invest online very quickly from their chair through a mobile application. The involvement of these platforms usually ends with the successful closing of an investment campaign. Not all platforms work closely with companies after closing an investment. The management of the investment is usually handed over to the company itself, which might not have the necessary experience.
Selecting the right investors who match the needs of a company in terms of knowledge, expertise and networks is necessary to steer it on the path of growth and success. This is the approach of a selected few and very professionally-oriented crowdinvesting platforms. They focus on establishing personal relationships between investors and a company, manage the investment and keep working with the company after the investment is closed to secure investor rights and help the company grow. These platforms offer more intimacy – investors can meet founders and discuss their business in great detail in person, which can help the decision-making process.
Investors with an entrepreneurial background can also meet with others and share their insight and knowledge and create additional business opportunities.