Start-ups take root with Seedrs funds
When the founders of Storemates were filmed for the Dragons' Den TV programme in April, their hopes of investment â€“ and free publicity â€“ ran high. Instead, the business Dragons shot down their idea of letting people rent out spare rooms for storage. Entrepreneur Duncan Bannatyne labelled them "a boy group", and they left with no money.
By the time the show was broadcast in October, however, the start-up had raised £40,000 in exchange for equity of 10 per cent. But rather than relying on a panel of publicity-friendly venture capitalists, Storemates used Seedrs, an online platform that lets everyday investors pump money into young companies.
"We expected it to take 90 days," says Ben Rogers, co-founder of Storemates. "We reached [our funding target] in six days. We had 35 investors." Storemates is one of six start-ups that Seedrs has helped to raise funds since it launched in July, with the aim of making it easier for investors to put seed capital into new ventures.
"There is a huge supply and demand imbalance when it comes to capital," explains Jeff Lynn, chief executive and co-founder of Seedrs. "It takes a lot of money to invest. With us, [investors] get to act as angels without investing much. In the process, it turns start-ups into a sensible part of a portfolio."
Wannabe angels can invest as little as £10, or as much as £150,000, in start-up companies on the Seedrs platform. At present, they have 26 to choose from.
Seedrs' business model is to take 7.5 per cent of any money raised by the company â€“ and the same cut of any profit made by an investor, through an exit or dividend. While steep, Mr Lynn argues that Seedrs' percentage works out as roughly the same as the legal fees incurred on a standard funding deal.
His aim is to provide a flexible solution for start-ups that are asked to give up too much equity by angel investors, in return for levels of funding that they are not ready to use.
Greg Pallis, co-founder of PlayBrighter, which makes educational games, ran into this problem when he tried to raise £30,000.
"We had a demo [of the games], which we could show to investors, but basically we needed our food bill covered for the next nine months," says Mr Pallis. "Angels will offer you £100,000 for 30 per cent and if you say no, they will be bemused by that. We didn't need that much money â€“ and it's not worth their time for only 8 per cent of the company."
Instead PlayBrighter raised the £30,000 from 22 individual investors via Seedrs, giving up 8 per cent of the group.
Seedrs is the latest in a series of alternative finance start-ups to emerge in London.
Companies ranging from Market Invoice, the online auctioneer of invoices for cash-strapped businesses, to Wonga, the payday loan company, have set up shop in the capital in the last few years.
Kickstarter, a crowdfunding website that lets users donate to unconventional business projects â€“ which have included vegan cookbooks and a pillow designed for office power naps â€“ launched in the UK in October.
While "financial innovation" has become a dirty word since the financial crisis, Seedrs argues that its model is, in essence, conventional. "These [businesses] are a straightforward, real asset class," says Mr Lynn. "There is no casino element, no derivatives â€“ you buy shares in a company."
However, the originality of the online platform approach was a hindrance when seeking regulatory approval. It took 13 months to get the green light from the Financial Services Authority â€“ not long in terms of government bureaucracy, but a lifetime for a start-up.
Mr Lynn manages a strained politeness when recalling the process: "It was square pegs into round holes. We were a very novel business and the FSA is not equipped to handle innovation. It would have been very easy for them to shut us down."
But the advent of new government initiatives â€“ such as the Seed Enterprise Investment Scheme (SEIS), which grants investors tax relief of up to 78 per cent â€“ has triggered a spate of interest in seed funding. Even with SEIS, though, there is no disguising that start-ups are high risk and illiquid investments.
Seedrs acknowledges the risk, but sees its role as giving investors the information to make their own decisions. Mr Lynn says its role extends little beyond due diligence and the 'Ronseal' test. "We try not to say, 'This is a good business'. What we do is disclosure and accuracy. We make sure the company is what it says on the tin."