Price Bailey research compares growth outcomes for businesses funded by crowdfunding and by private equity/VCs

Early-stage businesses that seek crowdfunding typically achieve lower growth rates than those with private equity or venture capital-backed businesses, research from Price Bailey has shown.

The accountancy and advisory firm, which has a Cambridge Business Park base, found that seed-stage businesses that sought funding from the crowd raised on average £1.1million with an average turnover of £141,000 at the point of investment.

Meanwhile, seed-stage businesses seeking private equity or venture capital (PE/VC) investment raised on average £2.9m, and had an average turnover of £1.3m at that point.

At the venture stage, meanwhile, crowdfunded ventures had an average cheque size of £1.4m with an average turnover of £2.8m at the point of investment. But those companies that went to PE/VC investors raised, on average, £4.4m in their first round and had an average turnover of £3.2m.

Price Bailey also found deal volumes are on the decline. From a high in 2021, it is now harder to raise early-stage funding.

Chand Chudasama, partner and strategic corporate finance expert at Price Bailey, said: “From our research, we can see that regardless of where these businesses are sourcing their investment from, it has been a challenging time. This is no surprise, given the prevailing economic uncertainty over the last few years, but there has been a sharp and distinct decline in investment deals from the heights of 2021.

"It’s also clear that at both stages of evolution (seed and venture), those businesses that went to the crowd are seemingly at the smaller end of the stages, while those who went to PE/VC investors are at the larger end.

“There also appears to be a split in investment source for consumer and B2B businesses, with the majority of consumer businesses seeking the crowd for investment, while B2B organisations seek PE/VC investment the majority of the time.”

Price Bailey’s research examined 1,075 crowdfunded businesses and 3,472 PE/VC businesses.

It found that the crowd raises up to £1.5m relatively frequently, but that raising above £5m is rare, and that crowdfunded businesses have a one in three chance of being valued above £50m within three years of crowdfunding.

Only 7 per cent of crowdfunded businesses have exited in the last seven years.

The firm said that entrepreneurs should expect up to 30 per cent dilution in their first meaningful investment round.

Price Bailey’s report noted: “Follow-on funding post-crowd is best coming from a mix of crowd investors and professional investors in terms of the amount raised but at a 21 per cent lower valuation than other routes, which is close to one in five instances.”

Angel investors continue to be important to crowdfunded businesses, it said.

Explaining the difference between businesses seeking the different funding routes, Price Bailey concluded: “Those pursuing PE/VC investment had proven the viability and commerciality of their business model and reached product/market fit with their target audiences.

“This is demonstrated through greater average turnovers, large proportions of businesses in the ‘growth’ stage and the 21 per cent of businesses that raised £5m-plus in their first significant PE/VC funding round.”

It also notes: “PE/VC have had longer to improve value creation than the crowd – in time perhaps the crowd exit values will increase.”

Mr Chudasama said: “I hope the findings from our report will be useful for early-stage business owners, looking for information on the best route for fundraising, as they grow their organisation.”

Visit pricebailey.co.uk/reports/crowdfunded-businesses/ for the full report.