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Crowdfunding start-ups - Herding investors

Nov 27th 2013, 12:30 by C. S.-W.

IN 2005 Venky Harinarayan and Anand Rajaraman, two venture capitalists, were

approached with an offer by Sean Parker, the founder of Napster, once the

internet s biggest music-sharing service. In exchange for a small amount, they

would be given a stake in a new start-up run by one of Mr Parker's associates.

They took him up on the offer. Today they still own their shares in Facebook,

and are much the richer for it.

The story of Messrs Harinrayan and Rajaraman is rare, but it does not stop some

dreaming of a prescient ground floor investment in a company about to crest a

wave of popularity. A growing number of websites on both sides of the Atlantic

feed that dream by offering would-be venture capitalists the ability to chance

their hand. Because of differences in regulation, however, British crowdfunding

sites got an early start (in America soliciting such investments from the

general public has only recently become legal, and not all regulatory problems

have been worked out). To capitalise on their advantage Britain s crowdfunders

are now going international.

Seedrs is one such business. Launched in July 2012 the site initially offered

investors the chance to put their money in Britain-based start-ups. This week

it announced its expansion into Europe: it now also allows continental

investors and entrepreneurs to use its platform. To be able to add momentum to

this move, it is reaching out to investors via its own platform for the first

time, hoping to raise 750,000 ($1.2m) for a 12,66% stake.

If it does not raise money for itself, Seedrs takes 7.5% of each successful

funding round sourced from its crowd of investors. Nearly 50 start-ups have

raised 3.7m in funding. The typical backer is a tech-savvy professional in his

30s or 40s, says Jeff Lynn, Seedrs' chief executive, but recent graduates

looking for a nest egg and retirees hoping to boost their pension pot also

support start-ups.

Crowdcube, another British crowdfunding service, announced last week that it

has forged a technology partnership with a site in Italy, adding to similar

deals it already has sealed with firms in New Zealand and Spain. In Britain

Crowdcube has helped 81 businesses to raise nearly 16m, taking a fee of 5% of

the amount invested. The average investor stumps up 2,500 for his stake. Most

of the start-ups funded through the platform are based in the south of England;

only a solitary Scottish start-up has won over backers. Four in five start-ups

that seek support fail to raise enough interest, demonstrating that Crowdcube's

users are discerning with their money.

Both platforms are regulated by the Financial Services Authority, ensuring that

investors' cash does not disappear. And both are middlemen: they bring an

audience to the product, and the product to an audience. But whereas Crowdcube

introduces investors to investments and moves on, Seedrs manages the

investments on behalf of its users until the firm is sold, goes public or belly

up.

Both services owe a debt to Kickstarter, a crowdfunding site on which backers

are rewarded with gifts (a CD, a book, or a magazine) or early access to the

products they support, rather than a share in a company. Those backing a

Kickstarter campaign expect only a finished item, though. Those funding

start-ups may want to have a say, even if their investment is small. Nearly 80

people invest in the average project that passes through Crowdcube. Getting

them to sign the papers, for instance when a start-up wants to raise real

venture capital may be hard. The risk is that crowdfunding today may mean

herding cats tomorrow.