How crowdfunders are falling out of love with startups… and how to win them back

When Allplants fell into administration in November, the situation was all-too-familiar. After raising £4.5m in 2020 – the UK’s biggest vegan crowd campaign at the time – more than 2,000 crowdfunders took a bath on their investment.

On top of soft drinks brand Nix & Kix, Wild Beer, Meatless Farm and Blockhead chewing gum, the list of fmcg startups and challenger brands that have been backed by the crowd before going bust keeps growing. And the sums investors have lost are eye-watering.

So is the crowd still working? Are these isolated business failures or is there a wider governance issue? And if so what needs to be done to protect this vital source of funding?

After all, crowdfunding has been an invaluable source of finance for the startup community. None more so than for BrewDog. Between 2009 and 2021 it raised $100m from over 200,000 so-called ‘equity punks’. And with other finance sources drying up it’s arguably never been more important, so many fmcg brands are still very much active. Nut butter brand Manilife completed its fifth crowdfunding campaign earlier this year and has now raised more than £3m from the crowd, for example. And for Manilife founder Stu Macdonald, “my experience has been nothing but positive. Without Seedrs [now Republic Europe], getting Manilife off the ground would have been a lot more challenging.

“It’s democratised access to funding for brands. We had 120 people come in, and they were all customers. In what other world could that have happened?”

Bamboo toilet roll brand Cheeky Panda is another advocate. It launched its first crowdfunding round in 2017 when it was about 18 months old because, according to co-founder Chris Forbes, businesses at that age “don’t really get any form of lending from banks”. Inspired by BrewDog’s example, Forbes thought it was “a great way to engage with consumers” and to “fix the funding gap we had”.

Traditionally, fmcg brands have tended to perform strongly in crowdfunding rounds, “because they’re things people can touch and feel”, says Forbes. “A drinks brand or crisps brand is easier for a consumer to understand than a widget or software brand.”

Indeed, food and drink raises often exceed their targets, says Matt Cooper, Crowdcube co-CEO. “Sixty-two per cent raise up to 199% of their goal, 6% raise up to 299%, and 15% exceed 300% of their target.”

It’s a similar story at the other main UK crowdfunding platform Republic Europe, formerly Seedrs – where last year, food and beverage campaigns had a success rate of 87%, higher than the platform average.

“Food & beverage has consistently been one of the top-performing sectors on Republic Europe, and in 2024 F&B rounds made up over 24% of all successful campaigns,” says Katherine Gilroy, manager of the UK & EU business development team at Republic Europe.

However, success isn’t just about the raise itself. It’s also about value creation for all investors. And that means an exit – or at least some form of payback. But even BrewDog, whose fundraising stunts “flipped the script on traditional crowdfunding”, has not provided a return on investment for the majority of crowd investors, with a promised IPO failing to materialise.

And industry veteran Giles Brook struggles to recall “brands raising on the crowd and later in their tenure going to a successful exit, with a couple of notable exceptions”.

Of course, investments in startups are rarely overnight successes. It took 10 years for the founders of Innocent Drinks to achieve an exit, for example. But the record of crowdfunded businesses isn’t great: only 6% of companies who completed crowdfunding rounds from 2011 to 2021 have since exited the market through either an IPO or acquisition, compared with 11% of venture rounds, according to analysts Beauhurst. In addition, crowdfunded companies were more likely to go under (20% vs 12%) and less likely to have progressed to “later stages of evolution” (18% vs 22% of venture rounds).

Indeed, crowdfunding as a whole is on the wane, figures from Beauhurst show: the number of crowdfunding deals has dropped from 569 rounds in 2021, to 519 in 2022 and most recently just 297 in 2024, the lowest figure since 2014. The picture is similar for crowdfunding investment levels: after reaching its peak of £773m in 2021 there has been a sharp drop-off to £324m in 2024.

Inflated valuations

This cooling interest in crowdfunding is partly self-inflicted. “There are many, many examples of businesses that have been on those platforms over the past few years who realistically shouldn’t have been allowed on because they were there in very questionable circumstances,” says Joe Benn, a former food and drink entrepreneur turned partner at investment fund MNC Ventures.

And even where there is potential, startups have too often been allowed to come up with inflated valuations, which has stymied further investment or led to heartache for crowdfunding investors. Indeed, Benn still sees brands using “really spurious methodologies to come to their valuations”, citing a recent example where a brand used a wholly unrealistic revenue multiplier for future sales that inevitably the brand got nowhere near to achieving.

The brand in question has since had a big ‘down round’ – an investment that lowers the overall value of existing shares. “That was one that a lot of people, not only in the food & beverage industry, but across the investment community were talking about, going: ‘What the f*** happened there? How did they get away with it?’ There needs to be more transparency.”

Since the early days of crowdfunding, regulations have been tightened to address insufficient oversight from the major platforms.

“Regulation is robust,” insists Jonathan Keeling, ex-chief growth officer at Crowdcube, who now runs crowdfunding consultancy Edge. “The FCA has a dedicated team overseeing promotions and conduct across the industry. In fact, equity crowdfunding has played a role in advancing regulation in the wider alternative investments market. While some campaigns may overpromise, there’s no evidence to suggest crowdfunding lacks transparency or operates without oversight.”

Crowdcube’s Cooper adds there are “strict due diligence processes to ensure all fundraising campaigns are transparent, accurate and fair”. Every pitch undergoes “rigorous” checks on legal structure, directors and key business claims using third-party providers. The process, he adds, typically takes three to four weeks.

Sneaky marketing

Nonetheless, some of the marketing tactics used to promote investment rounds leave a lot to be desired, says Benn. What people don’t realise with crowdfunding is that the total raised very rarely comes solely from small investors on the crowd, he points out. For most brands, if they were aiming to raise, say, £1m, they would usually have 60%-80% of it – sometimes all of it – already committed from angels and other funding sources. This is often what leads to headlines like ‘X brand smashes crowdfunding target in less than 24 hours’.

“It’s a little bit sneaky,” says Benn. “Because you launch a campaign and then say: ‘Oh, wow! We’re 100% funded in 24 hours, isn’t this amazing, the traction has been overwhelming.’ Whereas in reality that was already there. But the less sophisticated crowd investor can’t see that, right? So, they think: ‘Yeah, sure, I’ll come in on this.’”

Manilife’s Macdonald admits misleading headlines over how quickly a certain sum was raised are “problematic”. However, it’s also “a saving grace” that there’s nearly always sophisticated investors and money coming in at the same time, he argues.

“This narrative that the crowd gets abused, and it’s got bad actors – well, there are bad actors in every sphere. This isn’t a crowd issue,” he says. “This is just what happens when you come off the back of a bubble into what are probably some of the toughest market conditions we’ve seen for 10 years.”

And of course, investing is inherently risky – a fact pointed out by every source The Grocer spoke to. But Giles Brook still feels the platforms are “not kicking the tyres enough”.

“I think it’s got better. But do I think it’s where it needs to be relative to the risk people are taking? I don’t think it is,” he says. “The number of times I’ve seen updates go out on the crowd and there’ll be some really woolly talk about how things are going so well, but there’s a massive miss on fiscal information.”

Manilife’s Macdonald agrees it’s crucial to “find ways to stop people hiding behind ambiguity”. And for Gilroy at Republic: “The best success we see is when a company values a £20 crowd investor in the same way they value a £20k angel investor or £2m institution. Equally.”

Inevitably, crowdfunders are becoming more discerning not only with their cash but their questions, adds Gilroy: “We definitely see the types of questions investors ask on the discussion forums over the years have become much more focused on financials, growth metrics and market opportunity instead of the mission.”

But high-profile failures are also hitting confidence, reckons Brook. “The more brands that are going under – and it’s a tough environment, it’s not just crowdfunded businesses going under – and the more publicity there is around that, it has to be undermining confidence,” he says.

However, the decline in crowdfunding investment isn’t just about success or confidence, says Cheeky Panda’s Forbes, who used to work in capital markets. Most people just don’t have as much money sloshing around. “The peak of crowdfunding was around 2020-2021. A lot of it was because [during lockdowns] people were working from home, not going out and suddenly they’ve got lots of extra cash,” he says. “Crowdfunding investment is probably down 60%-70% from its peak, because people are looking at energy costs, house pricing, standard of living – everything’s been squeezed.”

As a result, crowdfunding is being seen as a top-up tool rather than a primary means of raising for more startups. Whereas brands could legitimately raise their entire first round on crowdfunding platforms previously, Benn reckons that’s now “almost impossible”.

This approach is epitomised by sustainable toothbrush brand Suri, he says: “The brand’s on fire, it’s raised money from legitimate VCs and investors, and then also from the crowd to finish and basically acquire long-term customers. That’s all good, that’s legit.”

Best practice

Above all, Brook advises brands to think long term. “In isolation the crowd platforms can look really attractive, but I would encourage founders to think about the longevity of the business journey,” he says. “You’ll have to raise multiple times – so just be really careful that how you raise on the crowd initially doesn’t become problematic when you try and raise again in the future. A lot of investors won’t embrace valuations on the crowd when it comes to later rounds because they tend to be raising off silly multiples.”

It’s important because for many startups and challenger brands, the crowd might be the only option. Founders from lower socioeconomic backgrounds, for example, are less likely to have access to funds from friends and family or the social capital to know where to start, let alone get in a room with private equity investors or VCs. The same may be true for founders if they’re new to the sector.

“As someone who’s chased investment as a founder, it’s impenetrable and, let’s be honest, intimidating,” says Benn. “You’re meeting these guys in their Mayfair offices, or the members’ clubs or whatever, and it’s just a different world to what most F&B founders are used to. And I’m sure if you looked at where that money goes, it’s predominantly white, male, well-off founders.”

Funding gap

He also points out a clear funding gap whereby a brand may be able to raise its first £250k-500k thanks to the very attractive SEIS and EIS tax benefits. However, it won’t be long before they’ve tapped all the typical angel investors who benefit from those – but the brand is not yet big enough for the VCs, who typically won’t look at a business until it hits £3m to £5m in revenue.

A useful tool to plug that gap can be family offices, which can act with more freedom than VCs and might have more money than individual investors. But again, familiar problems arise for some founders in that most family offices operate under the radar, according to Benn: “You don’t know who they are. You don’t know how to get in touch with them. Half of them operate off Gmail accounts and stuff. It’s a sort of secret world.”

There’s also a distinct lack of support from government when it comes to early stage funding, according to Brook, who feels England is lagging behind its neighbours in supporting founders.

“Entrepreneur relief used to be like 10% on £10m, and that got reduced to £1m. And now Rachel Reeves has just culled it even further,” he says. “But then you look at the number of entrepreneurs moving to Lisbon because there’s massive infrastructure to support you out there.

“So as a founder and an entrepreneur, the environment here isn’t that attractive. And if you’re coming from outside the industry, it’s horrendously difficult to raise money, so I think the crowd is accessible for those guys relative to other options. But its biggest issue is that the crowd’s in danger of becoming the place where brands that are struggling to raise good money privately will go because they think it’s easier. And that’s not a reputation the crowd platforms want.”