Equity crowdfunding and due diligence requirements
14 Oct 2019
Raising finance is always a challenge and taking the equity crowdfunding route requires additional due diligence. John Auckland of TribeFirst sets out key pointers for start-ups and growth stage companies
14 Oct 2019
Equity crowdfunding is a good opportunity for early and growth stage companies to gain essential funding, raise awareness among the investor community and gain loyal supporters.
However, as with any funding round it is important to ensure that companies go through due diligence. Whatever crowdfunding platform a company lists on, whether CrowdCube, Seedrs or any other, will have strict rules around what they can, and cannot say, and what evidence will be needed.
Investors using crowdfunding platforms know that giving their financial backing to any company comes with a risk, but they take comfort in the fact that platforms apply their own due diligence process to every prospective campaign.
Often unaware of the challenge ahead, many companies fail due diligence and end up significantly delaying their campaign. Rather than deliberately trying to mislead the platform, failure is often due to being unable to evidence claims.
This is where accountants can help. Here are a few tips to give compaies the best chance of getting past the crucial due diligence stage and speeding up what can sometimes be a glacial process.
Team bios – be prepared to evidence your team’s credentials
When investors are deciding whether to back your company, they pay close attention to the team’s credentials. For this reason, team biographies are an essential part of any equity crowdfunding pitch.
However, the claims made in team bios often delay the due diligence process more than any other section of the pitch. It comes back to the fact that every claim made – including the team’s career history – must be evidenced. If any of the bios cite ‘20 years’ experience in marketing’ or ‘spent two decades working as an accountant’, be expected to be asked for evidence going back 20 years to demonstrate this, including tax returns and payslips.
A better approach can be to pull out actual examples of companies the team members have worked for or concrete, provable achievements they made during their tenure. Again, these will have to be evidenced, and you cannot use LinkedIn or a CV.
So, a green technology company claiming that they used to work for the Environment Agency or the National Grid, for example, may need to show a contract or an email from the employer stating that they worked there, how long for, and what role they played.
Likewise, the CEO of a new challenger brand claiming they founded a company and sold it for £5m will have to provide the documentation to prove the date they founded it and the sale price.
It is also key to avoid vague statements or exaggerations, instead opting for clear, verifiable facts.
Former employers tend to take ages to get back and, as the platform will definitely ask you for their references, it is really worth chasing them up before the pitch is even submitted.
Check your numbers, know your market
It is no surprise that investors will want to see some numbers to give them an idea of how the company is performing, a picture of the overall market, and how you can further tap into it.
It might sound impressive that there were 10,000 sales last month, or a 300% sales growth was achieved in just one year, but this needs to be demonstrated. When making claims like this, the platform may need a complete list of the sales and revenue calculations.
Even if the company is not yet profitable, it will need to prove that there is interest in the product or service. Finding reputable stats which show that X% of consumers complain about a problem the company has a solution to can prove very useful.
It is also worth locating original source industry figures which show how big the market is, including the current and projected future trends. Identifying and naming the competition in any documents being presented to investors, and certainly in any docs that will be attached to the pitch page, is another must.
Try not to claim that the company has a one-of-a-kind product or service when there is competition out there. This will suggest that either the company has not done its research, or it is trying to pretend that there are not any competitors in the market.
Videos are not exempt from fact-checking
Videos are a key part of any pitch – but just like claims made through any other media, they need to be evidenced.
Companies that have made their videos in advance of the due diligence process can often fall into trouble. Any claims they cannot prove must be cut, and if they are many, the video will have to be redone, wasting time and money. So, hold fire on making the video until the funding application is really ready.
The video script must be treated like any other text that is submitted to the platform. Analyse it line by line, have the clear evidence to hand, and this should make the due diligence straightforward. The due diligence process can be tough and at times frustrating so start as early as possible and always be clear and transparent.
About the author
John Auckland is a crowdfunding specialist and founder of TribeFirst, a global equity crowdfunding communications agency