Margareta Pagano: Crowd power can carry us to recovery

In The City

Margareta Pagano
Saturday 06 July 2013 22:08 BST
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Crowdfunding is one of the most thrilling developments in finance for at least a couple of hundred years – just check out how beer-lovers have poured their money into the Scottish craft brewery BrewDog. It is democratic, transparent, imaginative and inclusive as it lets the crowd – private investors – engage directly with start-up entrepreneurs and small firms looking for new sources of finance. It is also growing like topsy and going global.

There are now 600 crowdfunding platforms in the world and they have raised $5bn (£3.4bn) for new ventures. In the UK there are 40 or so crowd platforms that have provided about $1bn of new money for companies pitching either through debt, equity donations or reward-style incentives. The amounts being raised are still trivial compared with conventional bank finance – even now, after the crash, the UK's banks provide about £7bn a month to SMEs – but it has huge potential. Some suggest £15bn could be sourced from the UK crowd over the next few years as investors search for better returns for their cash.

By far the fastest growing are the peer-to-peer platforms, which offer investors a competitive interest rate in return for lending to either consumers or small business. Funding Circle, for example, has trebled the amount of money it has raised for small businesses in every year since its launch three years ago. In terms of risks for the investor, the P2P lenders are simple creatures and welcome being regulated by the Financial Conduct Authority (FCA) next year.

By contrast, investing in companies pitching on the crowdequity platforms is going to be longer-term and riskier. Even so, investors are proving keen and Crowdcube has now raised £10m for 56 companies that have pitched on its site. Others like Seedrs, Abundance Generation and Investing Zone, backed by the venture capitalist Jon Moulton, are also seeing a big rise in traffic from investors – and companies – on a daily basis.

Yet they share a common fear – that the regulators are in danger of taking the crowd out of crowdfunding. Indeed, Moulton is concerned that the FCA is going to strangle the industry at birth because it's being too heavy-handed and putting people off taking risks. In typical Moulton style, he told me: "You can stop all cancers if you kill all babies at birth." Quite. But his point is sound. At the moment, the FCA wants all sites to tell investors that they must prove they are high net worth and sophisticated if they are to register with them. To demonstrate this, investors have to fill in questionnaires to show they have the money – but everyone knows the answers can be made up.

Crowdcube and Seedrs also have to tell investors to have a diversified portfolio and invest a minimum of £1,000 across no fewer than 10 businesses in their first year of membership. How crazy is that? It's also unenforceable. Understandably, the FCA wants to protect consumers, but this sort of guidance is patronising to the public. Any potential investor looking at the companies pitching on these sites knows they are high-risk start-ups. Yet anyone is allowed to invest on the highly regulated stock market, so imagine you had invested your life savings in Royal Bank of Scotland in 2007 ... You can go into a betting shop and put large amounts of money on a horse, and no one is bothered.

Hopefully, the FCA's boss, Martin Wheatley, will make sure that when the watchdog publishes its consultation paper this autumn, it takes a proportionate approach. If carefully nurtured, crowdfunding has the power to shift the balance away from the big financial institutions that wrecked the economy, and give it back to the small business owners and the small investor to help kickstart growth. Even the Commission on Banking Standards said access should not be restricted to the "high net worth" individual. Let's hope the FCA chooses to walk with all angels and not just the rich few.

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