Megabuyte, September 2012. Original article here (£).
The Early View
Let’s fill this town with startups!
The experience of raising money for Seedrs, the startup crowdfunding company, was exactly the kind of hard slog that Jeff Lynn’s company wants to provide relief from. “We struggled desperately to raise our first seed capital. We kept joking: If only we existed!” I sat down with the co-founder and CEO at a coffee shop overlooking London’s Old Street roundabout, the epitome of the hotbed of activity that is Tech City, also known as Silicon Roundabout. Lynn is on his way to look at his new and improved offices just up the road; there’s money around for this now, following a £1m fundraising round secured in May with contributions from DFJ Espirit, Digital Prophets and angel investors. This takes the total raised to £1.3m.
“As we’re a startup, we started our fundraising process by going to the angels. But what we didn’t understand was that none of them really got financial services. The moment they heard the word ‘FSA’ they didn’t want to touch us,” says Lynn. Seedrs got FSA regulatory approval in March, meaning the company can position itself as a serious investment vehicle. The funding came primarily from the financial sector in the end, says Lynn, which turned out to be a perfect fit because although they may not get tech, they do understand finance. “For companies, raising capital is generally a very inefficient process. A lot of it is based on personal introductions, […] there’s a lot of needle in the haystack because you have to find the person who’s looking for exactly your kind of company,” says Lynn, recalling running around London to attend numerous meetings while trying to secure funding. Seedrs wants to remedy this by creating a portal to bring investors and companies together.
While Seedrs has only been up and running for two months following its July launch, it took three years of preparation to reach this point. “The tricky part was the legals. This is a brand new type of financial services, and getting regulatory approval was the hard part,” says Lynn, whose experience as a corporate lawyer at Sullivan & Cromwell in London and New York meant the young company could manoeuvre the regulatory challenges without going broke on legal fees. “I think a lot of people, over a long period of time, looked at this area and thought it couldn’t be done, or they thought it would take too much time and money to do it. We saw it as a challenge.”
The initial comparison for what Seedrs does is often Kickstarter and IndieGoGo, the popular crowdfunding platforms. While Lynn is a fan of Kickstarter, he is quick to point out that this is mostly for creative projects; it provides no real financial upside and it’s not a platform approached with the mindset of an investor. Seedrs, on the other hand, is for companies looking for their first round of funding, up to £150,000. This means potential investors will benefit from the Government’s SEIS (Seed Enterprise Investment Scheme) initiative, which provides 50% income tax relief on investments and exemption from capital gains tax upon exit. Seedrs takes 7.5% of the funds raised, and if the company proves profitable, Seedrs also takes 7.5% of investors’ profit. Seedrs will structure the transaction, including carrying out legal due diligence and executing subscription agreements, plus holding and managing the shares on behalf of investors; “That last one is critical, and one of the points often misunderstood in this space,” says Lynn, explaining how having a few hundred people supporting you is great for providing capital, support and early adopters, but having this number of people on the shareholder register is a bit of a nightmare. Seedrs’ role will therefore make it easier for the entrepreneur to expand later by making sure it doesn’t have to reach 300 people to get consent to waive a particular provision or agreement. Seedrs will also vote on behalf of investors, and while they don’t sit on the board, they take on a “guardian” role to protect investors against effects of dilution or other “nasty things” that can happen to investors of private companies. Concludes Lynn: “We don’t think the role as mass-funded startups would work at all without some central party doing the management. The crowds can make great investment decisions, but crowd management doesn’t tend to work very well.”
On that note, Seedrs will not have an opinion on the companies it helps to raise money, as that’s for the market to decide. What they will do, however, is filter for operations that may be illegal, unethical or generally not what they say on the tin. Potential investors will need to fill in a short questionnaire, designed to prevent money laundering but also to make sure people understand the risks of startup investing. Lynn certainly doesn’t mince his words on this point: “It’s vital people understand that in any given investment they will most likely lose their money. As part of a portfolio they can make a good return, but they need to be prepared to lose their money on any single investment.” Lynn reckons you need as many as 100 startups in your portfolio to ensure sufficient diversification to get the rewards. Consequently, Seedrs sees itself as an attractive option for high-net-worth investment angels keen for a more efficient way to access new companies, as well as smaller investors previously unable to access the sector for being too complicated or requiring too big a cash pile.
So far, Seedrs has successfully channelled funding for four companies: two web tech, one financial tech and one games group. While the “Shoreditch crowd” was first to clue on to Seedrs, Lynn wants to attract a broad array of companies, including services, restaurants, niche manufacturing and so on: “We want everyone. We’re limited to pre-revenue companies seeking £150,000 or less, so as long as you’re starting out, and that amount of money is properly useful to you, we want you.”
At the moment, Seedrs employs four people in London, soon to be six, while co-founder and COO Carlos Silva runs a seven-strong development team in Lisbon. Lynn, who is also Chairman of the government’s Coalition for a Digital Economy group, wants Seedrs to ultimately be the go-to place for UK startups seeking their first cash. Having said that, Lynn readily admits the sky’s the limit: “We want to be a global player. We are very keen to expand to Europe, and we’re also looking at other markets.” The legalities means this has to be done on a jurisdiction-by-jurisdiction basis, so bigger countries such as Brazil, India, Japan and China are key geographic ambitions. And then there’s Lynn’s native US, where next year’s likely implementation of the American Jobs Act will make business crowdfunding legal: “There are already dozens of platforms lining up to do this for the US market. […] So while these platforms fight it out for the American market, we want to go around and build up the rest of the world. Entrepreneurship exists everywhere.”