Crowdfunding Enterprise Forum at House of Lords

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