Do you want to turn fans into shareholders in your startup? Equity financing is rising

Oscar Raaijmakers has had a busy time. To be hard seltzer brand Kugi needs money to grow, so he knocked on the door of about eighty in recent months venture capitalist, private equity parties and angel investors. Most of them happened to get zero on the bill, but some took the plunge.

Equity financing

They wanted to invest and do so now through a so-called sharefunding model. As a startup, you sell a percentage of your shares to fans and investors, who can become a direct shareholder from a few hundred euros.

If there are dividends to be distributed, the small shareholders can also benefit from it. After two years, they can resell their share. If the start-up is rated higher by new lenders, then this is accompanied by a profit.

Sharefunding, or selling shares through a platform, has been a household name in the Anglo-Saxon world for years. The Scottish beer brand Brewdog is perhaps the flag bearer of this type of funding. Under the denominator ‘equity for punks’, the unruly company managed to raise no less than £ 30.2 million from more than 73,000 small investors since 2009.

Wind in the sails

The phenomenon also has wind in its sails in Holland. Last year, more than 30 million euros were crowdfunded with shares in our country, reports the data agency Crowdfundingwaarden.nl. In 2020, it was still 7.8 million euros. The majority of the entire crowdfund market, worth 730 million euros in 2021, still consists of loans, but the stock variant is making modest progress.

Equity financing is not debt financing

That as a startup you do not have to pay back your money as you should with a loan, accused Raaijmakers. ‘It’s not debt financing, as with convertible loans. So you do not take out a loan where you have to pay out about 4 to 5 percent in interest annually to a platform and the investors. In addition, you create a nice following of ambassadors who will support your business. ‘

Kugi will launch its campaign next week to raise 300,000 euros against 10 percent of the shares. Next year, the company hopes to raise another 1 million euros in this way. Enthusiasts can join from 250 euros. Two hundred people, including catering entrepreneur Won Yip, have already indicated they are investing in Raaijmakers’ campaign.

Authorized Shareholders

Anyone who brings in more than 40,000 euros even gets the right to vote in the start-up. Do Raaijmakers not fear authorized shareholders? No, he says: ‘We think it’s nice to have extra people on board. If they invest that much, they will also have an affinity for the product. ‘

We prefer not to see multiple captains on the same ship

Giving away the right to vote is not a mandatory number for those who participate in share funding. The social soup producer Oma’s Soep will also start a sharefunding campaign next week, but will not give new shareholders possibly. space at the table† All investors will be admitted to a so-called trust office fund (STAK), which speaks from one organization, says co-founder Max Kranendijk. “We would rather not see more captains on the same ship.” He sees sharefunding as a good option for angel investors. ‘They will start to blend faster into your business while you now have the freedom.’

Give dividends away

Oma’s Soep hopes to raise 500,000 to 1 million euros from small investors. Kranendijk expects to make a profit this year, just as the company says it has done for the past two years. Half of this profit goes to a fund that fights loneliness among the elderly, but the rest is intended for investment and payment of dividends. According to him, the new investors will also be able to benefit from this.

Anyway, Kranendijk will soon have a few hundred small investors who will be interested in an annual sum of money in their account. What if the entrepreneur soon feels pressured to pay out as much dividends as possible to new shareholders? You can also use this money to grow your business.

Kranendijk is not worried about this. “Investors will find it important that your business increases in value. Their shares therefore increase in value and provide a profit in the event of a sale† If there is to be reinvestment, they will understand, I think «.

Pioneering platforms

Our country does not yet have many sharefunding platforms. Enthusiasts have to settle for a few groundbreaking websites, of which Eyevestor is the best known. That’s why Kugi does business.

Grandma’s Soup chose another, new platform, called Broccoli. The site was launched in April and has already rolled out two successful campaigns. The Neleman wine brand raised 1.5 million euros from around 4,400 investors. The yoghurt supplier YB has – so far – collected almost 9 tonnes from more than 600 investors. All the small investors can trade their shares again after two years on the same platform.

Equity financing is an old principle

The principle of sharefunding is by no means new, says Wouter Hagoort, co-founder of Broccoli. ‘It has actually been done since the inception of VOC. Skippers crossed the dam looking for other people who could raise money for a new boat that could sail to the other side of the earth. ‘

Stock traders do not care what they invest in. Why else would you invest in Shell?

The stock market emerged a little later, says Hagoort, ‘but most stock traders today have little affinity with the brands they invest in. You have Tesla fans who buy shares of their favorite car brand, but for the most part it’s just flash trading . People do not care what they invest in. Why else would you invest in Shell? We try to turn it around by letting people become shareholders in the brands they identify with. “

Issuing shares via a platform has been a thing of the past, Hagoort believes. ‘If you want someone to join your company as a shareholder, go to a notary. This costs at least 500 euros and takes two to three weeks. We can do this faster by certifying shares and placing them in a STAK or cooperative. It enables the private transfer of depository receipts, as they call it. ‘

A major benefit of sharefunding is what Hagoort calls the ‘marketing element’. Small investors often become, to quote Kugi entrepreneur Raaijmakers, ‘ambassadors’. Hagoort investigated this at the wine brand Neleman. ’22 percent of their online sales seem to come from their 4,400 co-owners, while they have tens of thousands of customers. This means that these co-owners on average spend the most, have the highest retention and, for example, most often participate in member-get-memberactions. ‘

No criminals as shareholders

But how do you prevent criminals from taking a stake in your business? Hagoort has also thought about that. Anyone who registers as an investor on their site must upload their personal data. “They are going through a system with the biggest sanction lists in the world that we are subscribed to. All alarm bells are ringing for criminals. ‘

Even as a start-up or scale-up, you do not just get on the Hagoort platform. There is a door policy, the entrepreneur explains. First and foremost, a team of experts assesses whether the startup’s proposal is good enough. They also look at impact factors; For example, is a company B Corp certified? How are the employees doing?

In addition, Broccoli does a due diligence and dives into the financial statements. If a startup meets the requirements, such a company can run a campaign via Hagoort’s platform for a fee. “Such payment covers transaction, storage and software costs.”

Benefits of stock financing for startups:

  1. With angels and VCs you give away voting rights, with sharefunding you do not have to;
  2. You do not have to pay investors interest;
  3. You can keep the entire amount, it is not a loan;
  4. You can use it to create ambassadors who stay involved in your business.

Especially for consumer products

Sharefunding is not the ideal financing method for all startups, says Thomas Mensink. He is a startup analyst at Golden Egg Check and co-author of this year’s book Startup Funding. ‘You need to convince individuals to invest in your business. This is easier when you have a consumer product than when you need to complex deep tech– its busy.’

For startups with a consumer product like Kugi and Oma’s Soep, sharefunding can be a resort, Mensink believes. ‘You probably have VCs in the Netherlands for startups with business or software products, but for startups with a consumer product you have very few. Especially if your business is still in the early stages. ‘

Determine your own appreciation

Mensink sees challenges with sharefunding. When issuing a convertible loan, do not give a valuation. This only happens if you start trading with a professional venture investor in a follow-up round. Your current investors can then convert their loans into equities. If you immediately issue shares, e.g. with stock funding, you need a valuation. Investors need to know where they stand financially.

This early valuation presents challenges for both investors and startups, Mensink believes. First and foremost, investors. “A venture capitalist can assess such a valuation with a professional eye, but for the general public, such a thing is complicated. I have the impression that this type of investor is acting emotionally rather than rationally. They invest primarily because it is a tough company, but the question is whether it always makes financial sense. “

Rating too high or low

So the actual startups. If they have to provide a valuation separate from a professional investor, it can also present challenges. ‘I regularly see startups choose a fairly high valuation,’ says Mensink. ‘The risk is that you get stuck in follow-up rounds. New investors may find the valuation too high and decide not to invest. ‘

At the same time, there are risks in making a valuation that is too low, Mensink believes. ‘Suppose you are already diluting a lot, and with equity financing in your early stages, you are already giving away 20 percent of your shares. Some follow-up investors, whether angels or VCs, will be critical of it. They generally prefer that the founders do not lose too many shares in the initial phase. In a follow-up round, you have to dilute again.

underlift and tradition† Then you have a greater chance of refinancing

Broccoli entrepreneur Hagoort recognizes these challenges. ‘If your valuation is too high, you commit to a very ambitious business case that you may not reach,’ says the entrepreneur. ‘In fact, you have a silly story with a company that is valued too highly.’

‘We therefore say: underlift and tradition† Then you have a greater chance of further funding. You do not get much of a little, but a little of a lot. It’s also fairer, because you do it not only for yourself, but for all shareholders. ‘

Disadvantages of equity financing for startups:

  1. It does not work for startups with a complex product;
  2. You will need to clearly communicate why you are not paying dividends but investing in your growth;
  3. You must decide your own assessment. It may be too low or too high.

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