Crowdfunding is growing up - but with great power comes responsibility

Crowdfunding used to be the wild child of finance. Now it's become a big business, it's having to knuckle down and face greater scrutiny
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The Independent Online

In 2012, Emilie Holmes needed money to kit out her 1970s Citroen H van, and she needed it fast. With grand ideas for the old truck – she wanted to transform it into a travelling tea shop – she signed up as one of Kickstarter's first UK projects and raised £14,500 in five days, which was 45 per cent more than her target.

"At the time, it felt serendipitous," she remembers, midway through another round of funding, this time with Crowdcube. "It felt good to bring people together, and ever since, this community has been a really lovely source of support." She will soon open a bricks-and-mortar version, with another not far behind.

When the concept of crowdfunding emerged in the UK around six years ago (Kickstarter launched its UK site in early 2013), it was seen as more of a philanthropic affair rather than an investment opportunity, often supporting creative projects where there was no expected financial return. Musician Amanda Palmer raised $1.2m (£770,600) in 2012 for an album and tour (controversially, given her existing success). A project on Indiegogo, "Fly Edward Snowden Fly", asked for $200,000 (£128,500) to help the NSA whistleblower when he was trapped in a Moscow airport in 2013. It raised a few hundred dollars.

These types of projects still exist, and they still thrive with money raised from a wide network of investors, but crowdfunding itself has grown up. It attracts pitches for funds not only from small, existing companies, but also from very large and successful organisations, such as Adzuna, a search engine for jobs which is currently asking for £1.5m on Crowdcube, and is already overfunded with a week to go. JustPark, a website that matches drivers with the owners of spare parking spaces, raised £3.7m in 34 days earlier this year, also with Crowdcube.

Crowdfunding is often described as a "disruptive" force in financing. Bank loans and venture capital-backed funding are typically closed to start-ups or more unusual business ideas, and amateur investors don't have access to a great number of potential cash cows, so crowdfunding fills this gap.

 

In 2012, the innovation charity Nesta carried out an investigation into the industry and found that while it had generated £200m of investment in the UK that year, it had the potential to reach £15bn in the coming years – and £4.4bn in 2015 alone. "Since I started just three years ago, the industry has grown in both scale and maturity," says Julia Groves, chief executive of Trillion Fund, which offers asset-backed loans for investment in solar farms and wind turbines. This equity crowdfunding model, shared by Crowdcube and Seedrs, differs from the rewards-based example of Kickstarter, where you might invest in, say, a video game and receive a special edition of the game as your reward.

"There are now more than 9 million members of UK Crowdfunding sites. More than 600,000 projects have been funded and it remains a diverse and competitive industry – two attributes that we think were somewhat lacking in financial services before we came along," says Groves.

With the greater reach and responsibility of this pretender to traditional financing arrive the consequences of coming of age. Greater regulation is part of this. The UK Crowdfunding Association (UKFCA) was set up in December 2012 by the CEOs of 12 platforms to promote and protect the crowdfunding industry, as well as to work with regulators to find safe and straightforward ways for investment to become more accessible to the average investor.

For Crowdcube, that average investor is in their thirties or forties, lives in an urban area and has some existing knowledge of the finance sector. Just under 60 per cent are earning more than £60,000, while 15 per cent earn more than £200,000.

This certainly sounds very grown up, but crowdfunding sites are still full of really fascinating ideas. Who wouldn't be tempted by a vertical record player? Or an Oyster card for desks? Or a shirt that comes with a dry-cleaning contract?

Members of the UKFCA, which include Crowdcube, Trillion Fund and Seedrs, must now conform to a strict set of safeguards for investors, based on the Financial Conduct Authority's (FCA) recommendations. This self-examination has come at a price: the UKFCA threw two members out of its club last week for not conforming to its code of conduct. It has also been especially clear about its disregard for forms of crowdfunding that take different approaches, such as craft beer company Brewdog's Equity for Punks scheme. The fourth round of its self-organised funding drive raised £5m in three weeks in April."  

Growing a community and engaging with your customers is as much a part of crowdfunding as ever, and bigger companies recognise these values. Even the process of raising money online brings great marketing benefits and consumer insights, says Luke Lang, co-founder and CMO of Crowdcube. The challenge is for the industry to continue to look after the little guys – both the casual investor and the tiny start-up – as well as appealing to serious, and seriously rich, investors and large companies.

"We've seen a shift towards crowdfunding becoming a mainstream way of raising finance, with bigger and venture-capital backed businesses with stronger management teams coming to us," says Lang. These businesses could choose other types of finance, where start-ups often can't, but are now opting for crowdfunding because of its unique characteristics.

Recruitment website Adzuna is one such business. Co-founder Andrew Hunter, who was involved with Zoopla and Gumtree, explains that he is excited about the publicity and the potential of investors, who naturally become advocates for the businesses they invest in.

"Crowdfunding in the UK has matured a lot in the last 12 to 18 months and an increasing number of growth-stage companies such as Adzuna are going to the crowd for investment," he says. "Crowdfunding creates a simple platform to get our users and advocates involved in Adzuna in a unique way. That's the biggest draw for us."

The crowdfunding platform Seedrs has recruited Andy Murray to raise its profile, saying that the tennis star will provide advice on "the health, sport and wearable technology spaces".

This rapid growth brings complications. Critics say that crowdfunded companies are often overvalued. Data firm Beauhurst found that two-thirds of those raising up to £500,000 offered under 20 per cent in return. Private equity would expect a 44 per cent share for a similar amount, while angel investors would ask for 28 per cent.

"Regulation is either the biggest catalyst for the industry, or it could cut us off at the knees," says Groves. "But we have an open and healthy dialogue with the FCA."

Like Lang, Groves believes that the future of crowdfunding lies with bigger investors while maintaining the spirit of the crowd. "It is still a young industry, and, thankfully, an innovative one. But the biggest obstacle for the whole industry, I believe, is scale. "I have more conversations than ever with corporates, listed companies, who are now looking at crowdfunding as a means to engage and retain customers, by making them co-investors."

Lang says that 250 businesses have raised money on Crowdcube, some have done two rounds, and he expects to see exits very soon. If and when crowdfunding will produce its promised returns is the aspect that has not yet quite reached maturity – when this happens, we'll be able to describe it as "mainstream" with confidence.

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