Crowdfunding - from small beer to big money as industry becomes a serious business

In its early days, crowdfunding was seen as a fad - a way for bands to fund an album or slightly wacky projects to get off the ground. You might get a CD, a bottle of beer or a free t-shirt out of it, but it wasn't serious business.

Following the financial sector crash in 2008, crowdfunding began to be seen as a way for small businesses to obtain finance, filling the gap that the banks had left. Although it is still used for this purpose, which is very much a popular way for startups to obtain finance, things have moved on apace.

Crowdfunding is now being used by ever-larger organisations with various multi-million pound deals having taken place in 2014. Even large organisations are starting to realise that not only is crowdfunding a realistic option for obtaining finance but it is also an unrivalled way to get ambassadors for their brand.

The growth in larger crowdfunding deals taking place in the UK in 2014 meant that the average amount raised through equity crowdfunding was approximately £200,000.

A recent report by NESTA and the University of Cambridge predicts that the UK alternative finance market will be worth £4.4 billion by the end of 2015, with crowdfunding forming a significant part of this. This figure is certainly high enough for it to be seen as a rival to the more conventional methods of funding.

Banks get on board

There has been talk among the industry that the banks were going to realise the potential of alternative finance for small businesses - businesses which need options other than the bank just saying no.

Already in early 2015 we have seen RBS team up with peer-to-peer lending platforms Assetz Capital and Funding Circle. Where the bank is unable to provide finance to a client, it will refer some smaller businesses to these platforms. The bank may then be more likely to lend to a business which has proved that it has support, or pre-orders. It can take away the risk for traditional lenders, and the risk of losing a customer.

In the mix

Increasingly, we are going to see investment deals in which crowdfunding forms part of a mix of funding from multiple sources. Existing angel syndicates and networks such as Glasgow-based Kelvin Capital have their eyes open to it and are looking to work with it. I even expect investment brokers and hedge funds to start taking an interest as the growth increases and we begin to see some exits by the first crowdfunded businesses.

Crowdlending

Some crowdfunding platforms now also offer crowdlending opportunities. For example Crowdcube offer mini-bonds, allowing investors to lend money to more established brands over a set period for regular interest repayments. Brands including the Eden Project and River Cottage have already taken advantage of this to raise millions. Their success, and willingness to choose this route, is only going to encourage more businesses to do likewise.

Lending Crowd is a Scottish based peer-to-peer lending platform. Since launching the platform in September 2014, it has successfully funded 11 loans with a value of more than £700.000.

Regulation

As interest in crowdfunding rises, so too does the level of regulation imposed upon the platforms to ensure that the correct levels of protection are in place in relation to financial promotion to the public. At present this does not seem to be hindering the number of platforms establishing themselves in the UK. Even in Scotland we have seen some crowdfunding platforms have more of a presence here, highlighting the fact that people have been looking for a new and innovative way of investment.

Future proof?

It is probable that, given the increasing level of regulation and the number of platforms now in existence, at some point in the future we are going to see a failure - whether that is a crowdfunded business going into liquidation or a business not being able to provide the rewards that it promised.

Sceptics will be ready to pounce on such an event, but in truth it will be further evidence that the market is maturing. Failures occur in every industry, how they industry responds will be the crucial factor.

Whether or not that would slow down and deter the increasing number of investors looking to crowdfund remains to be seen, but I very much doubt it.

Instead, we are likely to see more niche platforms being established with a specific focus of the types of business on the platform.

Crowdfunding is here to stay, and the next few years are going to be very interesting.

If you'd like to find out more about crowdfunding, and how we could help, please email paula.skinner@harpermacleod.co.uk or call 0141 227 9271.