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Raising Capital for your start-up? Giftology or angel investments: which one to choose?

Posted: Wednesday 15 January 2020

This start-up guide is part of our Start-up Support initiative and was submitted by Envestors – a fintech company that connects investors and scale-up businesses.

Raising capital is challenging for any start-up.  Despite the fact that the digital age has made the process easier than ever, there is no one-size-fits-all solution and it’s important to consider which fundraising strategy is the best way for you to reach your target.

In Jersey, start-ups have the option of giftology or angel investments to raise capital. Here we focus on these two fundraising options to help you decide if either (or both) are right for your business.

What is the difference between an angel and a giftology backer?

Angel investors are classified as ‘high net worth individuals’ (those with more than £250,000 in the bank or an income of over £100,000) or ‘sophisticated investors’, meaning that they’re experts in the process.

Giftology is otherwise known as customer financing, whereby your future or current customers give money to a person or business advertising on a dedicated platform, in the expectation that they will receive a good or service at some stage in the future. Classic ‘giftology supporters’  tend to be less experienced in investing and to put in much smaller amounts.

How much do angels invest compared to giftology supporters?

An angel is not likely to invest anything below £10,000 and tends to have some expertise within the sector that they’re financing, meaning that down the line they can provide assistance and mentorship. Crowdfunded giftology campaign tend to attract unaccredited investors – a pledge can be as low as £10 –  and the chances are you won’t interact with them again beyond an automated thank-you.

Whereas, backers of crowd funded giftology campaigns neither receive equity nor voting rights. Instead, they receive goods in kind.

Angels and Typical Share Class

Angels want ordinary shares with three specific entitlements: pre-emption rights (that grant existing shareholders first refusal when a company is issuing new shares), tag along rights (that ensure when a majority shareholder sells their stake, the minority shareholder has the right to join the transaction and sell their minority stake in the company at the same time) and voting rights.  Angels investors that invest smaller amounts tend to receive B shares, which allows them to participate equally in dividends and, if the company is wound up, share in the proceeds of the company’s assets after all the debts have been paid.  These don’t bring the same rights as ordinary shares.

Giftology Supporters and Product Promise

Giftology supporters are your first customers – they expect to receive whatever service or product your plan to provide and, in return for their early commitment, receive a substantial discount or other benefit.  If your product or service is not going to be ready for some time, you need to be careful about how much you promise – the more specific you are, the less room you have to manoeuvre.

Due Diligence

An angel will be serious about due diligence.  They’ll spend an average of one to five days reviewing an investment and chances are, if you’ve got a secret, they’ll find it. Giftology backers tend to make a spur of the moment decision and any due diligence –is likely to be minimal.

Legals

Angels will have significant input on the terms of their investment and there are several legal norms in this process, from the Term Sheet to a Shareholder Agreement. Basically, when a founder is raising private capital, legal advice and guidance is essential. Traditional giftology backers have no control over the proceedings. However, as a funding seeker, decisions on the rights, if any, or giftology backer is at your discretion.

Involvement and guidance

An angel investor – as described above – will likely be more involved in your business than a member of the crowd, such as taking the role of a Non-Executive Director.  NEDs are responsible for keeping the executive directors and the entire board accountable. These directors can do this by helping with – and managing – a company’s strategy, performance and risk from an objective perspective unconnected to the closeness of day-to-day operations.  A start-up who is not looking for such hands-on support, might be better off giftology backers who won’t be so involved in the way the business chooses to take.

So, should you look for angel investors or Giftology?

Giftology is a great way to fund your capital raise through customer loans if your brand has a strong following, for example if you are solving a problem or offering a service people are passionate about. You can gain a lot of momentum quickly. Giftology is based on quantity, so you will have a high number of eyes on your deal. It can be 100% of your raise or a way to supplement your capital raised from funds, angels, grants etc.  And while giftology backers will be your cheerleaders, they won’t expect to get involved in your business.

Angels on the other hand, typically have more understanding of business and with the whole early-stage scaleup fundraising environment. Yes, they will invest more, but their cash is more difficult to extract and their due diligence is comprehensive. They will analyse your plans and forecasts, expect to meet your management team to test the chemistry and – in many cases – will want to be involved in your business in advisory or NED roles. However, for those looking for help with their growth with sound advice and contacts, angels can be a real blessing. Tight-knit investors are also more likely to provide follow-on investment; as companies usually do 4-5 raises before they reach maturity, this can be crucial.

Fundamentally, in the great debate of whether to raise capital via angels or giftology, there is no right answer. It comes down to what the business needs and these days, many find that a combination of the two is the best way forward.

You can read up on our options here, to give yourself the best chance of reaching your fundraising goal.

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