The UK has become the world leader in crowdfunding, constantly pushing the boundaries on deal sizes. And investees are finding that it doesn’t just win you growth finance, it wins you passionate advocates too
Eric Migicovsky, the founder of smartwatch company Pebble, was tearing his hair out in the spring of 2012. After months of knock-backs from Silicon Valley investors, the entrepreneur was running out of options – and capital.
Launching a Kickstarter campaign was his last hope. Even Migicovsky couldn’t have predicted what the outcome would be: Pebble raised $10.3 million (£7.2 million) in just over a month.
Though the US crowdfunding site initiated the entire movement, the UK has gained ground since. “The UK is miles ahead in equity and debt financing for the true ‘crowd’,” says Alex Hoye, founder of ski-maker Faction Skis and an angel investor.
“Due to restrictive laws on individual investors in the US and progressive financing perspectives in the UK, the UK is the global leader for true equity and debt crowdfunding.”
As the crowdfunding market has matured, it has inevitably become more complex. Whereas the benefits to investors on Kickstarter don’t stretch far beyond gaining early access to a new product or service, more sophisticated equity finance models, such as Crowdcube and Seedrs in the UK, entitle investors to a slice of the company.
Peer-to-peer lenders such as Funding Circle operate a debt finance model, enabling established businesses to borrow money without giving up any of their company; instead, they pay interest on the money they borrow, much like they would with a bank.
Plugging the crowdfunding gap
It’s easy to see why crowdfunding has become so popular. Plugging the gap between the so-called ‘friends and family’ round and the heftier venture capital rounds, it can provide a fledgling business with the cash it needs to get a business off the ground and launch a product to market.
Erik Fairbairn, founder and Chief Executive of POD Point, an electric vehicle charging company, has now run two successful crowdfunding rounds: the first in 2014, when he raised £1.22 million via Seedrs, and the second in December 2015, when he raised £1.8 million via Crowdcube.
“I reached out to Seedrs and said: ‘Do you think it’s possible to use crowdfunding to raise £1.5 million?’ They said: ‘I don’t think anyone has ever done that before – but let’s give it a try,’” Fairbairn says.
Why crowdfunding is being used to raise larger sums of finance
This marked the beginning of crowdfunding being used as a vehicle to raise larger and larger sums of money. “The deals are definitely getting bigger,” says Luke Lang, co-founder of Crowdcube. “We did 20 deals between £1 million and £4 million last year, and five of them were over £3 million. Before last year we’d done nine £1 million deals in the three years before 2011 and the end of 2014,” says Lang.
This can partly be explained by the growing popularity of the venture capital (VC) co-funded rounds. “VC firms are waking up to the benefits of crowdfunding and seeing how the crowd can be a valuable part of the funding mix,” adds Lang.
“In 2015 there was a very strong trend towards VC co-funded deals; where a business had VC investors previously, whether the VC was involved in the round alongside the crowd or whether the VC followed the crowd into the round. We did around 15 [such] deals last year.”
Not all businesses will be suited to crowdfunding, though not for the reasons one might think. They don’t necessarily need to be consumer products, says Lang.
“Most people would be surprised to hear that 29% of the businesses that were funded on our site last year had a B2B angle, dispelling the myth that crowdfunding is only about consumer products,” he says.
Potential investors need to really connect with the business, adds Hoye. “Serious equity crowdfunding is best for businesses that are tangible, have real market traction and that people can understand and grasp. It’s a bonus if it’s a firm people can love and want to be part of.”
The power of advocates
This is the part of the proposition that really appealed to Fairbairn, who now has 1,500 investors in his company. “If you get it right you gain an enormous amount of advocates. We’ve got this immense network of 1,500 people who, whenever conversation in their daily life turns to electric vehicles or electric vehicle charging, are very vocal about POD Point. And in PR terms and putting our company on the map, it’s been invaluable,” he says.
The expert’s view
Daniel Demir, Associate Director, Advisory, Grant Thornton UK LLP:
Crowdfunding is becoming part of mainstream business culture with funds raised going up 295% from 2014 to 2015. It’s potentially an excellent way to raise funds for growing businesses and opens up SME finance as a viable investment option for retail investors.
As we have seen in recent years, the average level of funds raised is steadily increasing. This will continue this year due to increased institutional investment and the introduction of the innovative finance Individual Savings Account (ISA) that facilitates investment in debt-based crowdfunding via an ISA wrapper.
However, the increase in available funds may lead to riskier investments. The industry has yet to have a large failure and it will be interesting to see how investors would react in such a situation.
The market will continue to grow exponentially and increased regulation needs to be brought in to ensure its trustworthiness and integrity.
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Image: Mark Chilvers