Despite phenomenal growth in crowdfunding over the past three years – funds raised in 2014 were up 161 per cent – the sector is still not widely seen as a genuine rival to mainstream financiers of smaller businesses. Private equity and venture capital firms, in particular, are relaxed about the threat crowdfunding poses, because individual deal sizes have been modest.
That may soon come to look complacent, for crowdfunding has reached the scale it needs to finance much larger transactions. Take the announcement on Friday by Crowdcube, the equity-based platform, which has broken its record for an individual fundraising thanks to a partnership with a similar platform in the US – investors on the two sites have committed £6.3m to Bitreserve, a specialist in digital currency.
This is no flash in the pan. Over at the reward-based crowdfunding platform Kickstarter, the Welsh technology company Torquing Group last week closed its pitch for funding to investors following overwhelming demand. Having set out to raise £125,000 to help it to bring a hand-held "nano drone" to market, the company closed the offer after just over £2.3m had been offered.
Peer-to-peer lending has had successes too – a residential housing project in London picked up £4.1m on the LendInvest platform last year.
In fact, the list of large deals in the UK is growing all the time. For example, the English sparkling wine company Chapel Down is £3.9m better off thanks to a fundraising on the equity-based platform Seedrs. The easyJet founder Sir Stelios Haji-Ioannou raised £1.4m for a property venture last year in another success for Crowdcube.
These sort of transactions are of a size to rival the bottom end of the private equity and venture capital sector. And crowdfunding remains a relatively immature and under-developed sector. Not only will there be more large deals done in the months and years ahead, but the deals will keep getting larger. In the US, for example, the biggest crowdfunding deal ever raised more than $13m (£8.6m) last year.
This isn’t how crowdfunding started out. When small businesses first began looking to sites such as Funding Circle and Ratesetter for finance, they were typically in need of much smaller amounts – tens of thousands of pounds, or even less – and were perceived as a source of finance for ventures struggling to get bank funding. Those businesses will continue to find the finance they need from crowdfunding, but the sector’s expansion at the top end will make it a credible competitor in a market that is currently the preserve of corporate financiers.
That assumes, of course, that the platforms are able to raise sufficient sums to lend or invest in the larger deals. There is reason to be confident: the supply of funding has kept pace with demand, and government support for the sector (through direct assistance, tax breaks and the inclusion of peer-to-peer lending in the individual savings account regime) should be an impetus for growth.
What would also help is a couple of big wins for crowdfunding investors in the equity-based sector. In that context, an announcement last week by Syndicate Room, one such platform, is encouraging. Last year, it helped the property company Mill Residential to raise £2m – now the firm has floated on the Alternative Investment Market at a price that values the company at around £3m. Syndicate Room’s investors have been able to get out with a profit.
Crowdfunding platforms are going to need more of these success stories – investors don’t expect to get paid overnight, but their patience will only last so long and there have been precious few similar examples so far.
Nevertheless, the crowdfunding phenomenon is advancing rapidly. What was once a cottage industry aimed at people marginalised or abandoned by mainstream financial services is becoming mainstream. And competitors in the funding ecosystem who write off crowdfunding as a dangerous rival do so at their peril.
Start-ups benefit from tech boom
Britain’s technology sector continues to gather pace, with 15,000 new companies launched last year alone, according to research. The accounting group NoPalaver says the number of technology companies rose from 306,000 at the end of 2013 to 321,000 in December 2014.
Growth has been helped by investors’ enthusiasm for technology, with start-ups in London alone raising some £1.4bn of venture capital last year, according to London & Partners. Other parts of the country have also seen growth, particularly in developing technology clusters often centred on academic institutions.
Graham Jenner, a director of NoPalaver, said: "Alongside the boom in consumer and retail apps, technological innovation is bringing the biggest shake-up to financial services since the launch of online banking. This is an area where London has a headstart against European rivals, thanks to the close links with the City."
Respite over new EU VAT rules
Good news on VAT for smaller businesses affected by the overhaul of EU rules on cross-border sales of digital goods (anything from music to e-books) which came into force on 1 January. HM Revenue & Customs is giving them another six months to introduce systems to comply with the new rules.
Until now, no business with annual sales below £81,000 has had to register for the VAT system in the UK, but this exemption no longer applies to any firm selling digital services to customers in another European Union country. They will also have to get to grips with rules requiring VAT on such sales to be charged at the rate payable in the customer’s country, rather than in the seller’s – that potentially requires firms to cope with 27 separate VAT systems.
From July, companies affected by the changes will need systems capable of dealing with HMRC to handle EU VAT payments, or to deal direct with overseas tax authorities.
Small Business Person of the Week: Richard Bye, Founder, Fat Lad at the Back
"I’ve been cycling for 20 years, always in baggy T-shirts because I could never find any good-quality kit to fit me – cycling gear just isn’t made to fit larger blokes. Last year, I did a ride with friends in the Alps and they made a T-shirt for me: it read “Fat Lad at the Back” (I’m always the one at the back when going up hills), and as soon as I saw it, I knew we were missing a trick.
"When we got home I started researching the market and I realised there was a real gap for a sports brand for all people – after all, all people do sport. We found manufacturers to do a first run for us, and it flew off the shelves – the cycling press picked up on us and we’d sold out by lunchtime on our first day.
"Since then, it’s been brilliant – every subsequent production run has sold out and we’ve expanded very quickly.
"We’ve been self-funded from the start, though I did appear on Dragon’s Den appealing for investment. We came quite close but some panellists felt the name would offend potential customers. They didn’t get it – anyone who cycles wouldn’t think of that as an offensive term.
"Not getting the money hasn’t held us back – in fact the appearance was great marketing for us. And since then we’ve had a Christmas season that was fantastic.
"Running a consumer business is tougher than working for a business-to-business firm, which is what I’ve done before, because you’ve got to appeal to new customers each day. But we’re growing fast and we’re already profitable, plus customers keep coming back."Reuse content