Crowdfunding - the act of raising finance directly
from a large number of people through relatively small amounts of money - is
seeing an explosion of growth in the UK and globally. The total global value of
crowdfunding is expected to double from $2.7bn to over $5.1bn this year alone.
In the UK, the crowdfunding sector is growing with established platforms
expanding rapidly and a range of new entrants set to emerge over the coming
year.
To discuss the opportunities and challenges that this
emerging sector holds, the APPG for Entrepreneurship invited representatives of
UK crowdfunding platforms and entrepreneurs who have made use of such platforms
to a themed Enterprise Forum in the House of Lords. The event was
chaired and hosted by The Earl of Erroll, along with Helene Martin Gee.
Julia Groves, Chair of the sector's new self-regulatory body, the
UK Crowdfunding Association (UKCFA) highlighted that crowdfunding offers
financial inclusion, lowering the barriers to entry and making investments
simple and transparent to everyone. She commented that crowdfunding platforms
can do far better than banks on educating consumers, helping them understand
the risks and helping them make the right investment choices.
Low minimum
investments of £5, £10, £100 through crowdfunding allow people to experiment
as they go. It also allows investors to build a diverse portfolio across a wide
range of industries and sectors.
Julia went on to highlight that for businesses,
crowdfunding provides an alternative way of raising money at a time when bank
lending is low. Crowdfunding also allows businesses to raise awareness at the
same time as raising finance. This can provide a good indicator of future
success - if a business fails to raise sufficient funding it could give insight
into potential problems with messaging, pricing or the product.
Closing her remarks, Julia commented: “The UKCFA
believes that crowdfunding can and will fill the space left by the
retracting bank lending but it requires appropriate and proportionate
regulation for the sector to grow. The UK has a good chance to lead
crowd-investing globally - its there for us to lose.”
Darren Westlake, CEO of Crowdcube went on to
speak about what drove him to launch the equity crowdfunding platform. “As a
nation there's no doubt we are incredibly inventive, innovative and creative.
We're really not short of ideas in this country. But what we fail to do is
cultivate, incubate and encourage these ideas to become real businesses. Quite
often ideas remain ideas and they never become profit making and revenue
generating real businesses. The biggest reason is lack of access to
finance. We need to empower individuals who have got ideas to raise finance and
get their ideas off the ground.
The idea behind Crowdcube was to lower the barrier to
allow ordinary people to invest in exciting new businesses. CrowdCube
brings together many people investing small amounts to form a much larger amount
for a particular purpose. Having launched two years ago, Crowdcube has now
funded 46 companies raising £7m. There are 34,000 members on the site, and the
funded companies are creating 600 jobs as a result of their investment.
Darren noted two key challenges. Firstly, the numbers
are still small and the industry needs to raise awareness amongst businesses
and individuals. Secondly, that Government SME finance support is focused on
debt-finance that is rarely suitable for early stage companies.
Instead, Darren suggested, Government reallocate debt-finance budget to co-invest
through equity crowdfunding platforms to give necessary support to small firms.
Also speaking were three entrepreneurs who have made
use of Crowdcube to crowdfund for their businesses. Below are short case
studies on each:
Andrew Wordsworth, E Car Club
E-car club has combined a car-sharing membership model
with electric vehicles to create a unique, wholly electric car club. Launched
in Milton Keynes last autumn, it has recently been adopted by Luton Council to
replace their pool cars, providing flexible car-usage for employees. The same
model has also been rolled out to social landlords in Tower Hamlets and other
communities that wish to make a meaningful contribution to the environment.
E-Car Club did not benefit from EIS as it is classed
by HMRC as an asset-based vehicle hire firm. This did make raising investment
harder, however they were able to raise £100,000 from 62 investors. On the back
of the Crowdcube success E Car Club was able to secure an additional £215,000
from an angel who had backed out beforehand.
Andrew commented, “With only 10 pages of documentation
required, it was the lowest transaction cost we have ever had to deal with. I'd
now say any business I start in the future I'd crowd fund if only for the
strategic benefits”.
Barry Laden, East End Manufacturing
In an effort to rejuvenate what was once a thriving industry
lost long ago to the far-east, Barry launched a manufacturing business in
Bethnal Green, East London. Having spent many years in fashion businesses and
supporting small independent designers through a showroom on Brick Lane, Barry
wanted to setup a high quality factory to allow designers to manufacture in the
UK.
Opened last October and formally launched by London
Mayor Boris Johnson in February, East End Manufacturing had brands come to them
immediately. The ability for brands to market that all clothing is designed and
manufactured in the UK is valuable, as is the good working conditions provided
to all staff.
Barry needed to expand to provide capacity for
potential orders from Next, Asos and others. After going live on Good Friday,
he raised £150k in 8 days from 72 investors. While he was relaxed about giving
away equity, and he found the process very rewarding, it was not easy – it
required a high quality pitch, financials etc and the potential investors asked
very robust questions.
Gem Misa, Righteous
Righteous produces a range of all natural salad
dressings. Now 3 years old, it was launched on a shoestring budget. By the end
of the first year, it was in 500 Tesco supermarkets and 200 Waitrose
supermarkets. At this point Gem started looking for finance to grow. Two banks and
other debt-finance platforms had previously turned Gem down as she didn’t have
assets to borrow against and at the time Righteous was not cash-flow positive.
Firstly Gem raised £75,000 to deliver a marketing
campaign that grew sales by 85% in the UK. In her second round, Gem raised
£150,000 to expand abroad. This allowed her to ship £90,000 of stock to CostCo
– this one order alone was 75% value of last year’s turnover.
Gem comments ‘No matter how much finance is put
through banks, they still won’t touch small firms like mine’.
Report compiled by Matt Smith
Policy Adviser, APPGE
