Here’s an ethical dilemma for would-be tycoons. Having got your business off the ground thanks to the financial contributions of well-wishers, what would you owe them if the company is eventually sold for a small fortune? Nothing? Their money back? Or a share of the profits?
This isn’t a theoretical question. The US start-up Oculus raised the best part of $2.5m (£1.5m) to finance its Oculus Rift virtual-reality technology project. The money came via Kickstarter, the crowdfunding site that match-makes projects in need of finance with individuals willing to contribute to them. Nothing is expected in return, though fundraisers often offer a thank-you of some sort – in Oculus’s case, all contributors got merchandising materials and those who put larger sums in were promised freebies from the company once it rolled out its prototypes.
Everyone was happy – until last week, when Facebook swooped on Oculus, snapping the business up for $2bn. At which point, the Oculus freebies those generous contributors received in return for their cash began to look decidedly small beer.
Oculus is under no obligation to pay them anything at all – not even to give them their money back. That wasn’t the deal it offered on Kickstarter, which doesn’t allow fundraisers to pitch for investment capital. However, there are those who think Oculus has a moral duty to offer them some sort of payout.
The Oculus case could have a dramatic impact on the British crowdfunding scene. In the US, companies seeking finance in this way have no option but to use contribution-based platforms such as Kickstarter, because the regulation necessary to allow investment-based platforms to operate legally does not yet exist. By contrast, the UK has several successful, equity-based crowdfunding options that provide a way to raise money.
The best-known of these platforms, Crowdcube and Seedrs, offer start-up businesses an opportunity to sell shares to investors. They get the finance they need and investors get the same rights as shareholders in any other business – to receive dividends, should the business ever be able to afford them, and a share of the proceeds if the company is ever sold, or floats on a stock market.
Seedrs reckons that had Oculus been able to raise money on an equity-based platform, rather than Kickstarter, an investor who’d put $300 into the business would just have received $20,000 from the Facebook deal.
That rather begs a question. Why would investors who have the option of putting money into businesses pitching via Seedrs or Crowdcube contemplate contributing to a start-up that is appealing for funds on a site such as Kickstarter?
It has a very active UK user base. Many Britons seeking project finance on the site need money for ideas that wouldn’t ever attract investors, but there are also many start-up businesses asking for cash. Anyone who has followed the cautionary tale of Oculus may now think twice about offering these businesses any money.
Aim on the up with a flock of flotations
The recovery on the Alternative Investment Market (Aim) is continuing: the 2013-14 financial year was the best year for initial public offerings ( IPOs) on the junior London stock exchange since the financial crisis.
Some 76 companies floated on Aim over the 12 months to the end of March, raising £2.2bn between them – more than in any period since 2007-08.
In March alone, 10 Aim IPOs picked up £671m from investors, the busiest single month for the market since July 2007.
The fund-raising figures have been buoyed by several large flotations, including Boohoo.com, DX and Dalata, all of which raised more than £2m each. But Aim is also benefiting from a slowdown in the number of companies leaving it – just 22 companies cancelled their listing because of financial stress or insolvency last year, down from a high of 93 in 2009-10.
“There hasn’t been a £2bn year for Aim IPOs since the credit crunch, so this is a significant milestone in the junior market’s return to growth,” said Laurance Sacker, a corporate-finance specialist at accountant UHY Hacker Young.
“The string of successful IPOs so far in 2014 should persuade more businesses that listing on Aim is once again a very viable way to raise funds for growth – there are already five IPOs scheduled for the first two weeks of April, and many more companies are pushing forward with their own plans.”
Service points way to alternative lenders
Is your small business struggling to find the finance it needs for growth?
If so, a new, online platform may represent a lifeline: the National Association of Commercial Finance Brokers’ (NACFB) new service, at findSMEfinance.co.uk, provides access to more than 100 alternative lenders for small and medium-sized enterprises (SMEs).
The organisation says its research suggests that very few small businesses have a good understanding of the finance options available to them beyond borrowing from the high-street banks – just 6 per cent are aware of what is on offer, the NACFB says.
The Government appears to share that view – last month, Chancellor George Osborne announced he would consult on how to set up a referral service that would signpost businesses turned down for finance to alternative providers.
“Despite various lending initiatives and awareness campaigns to make it easier for SMEs to borrow, small businesses still face significant challenges when it comes to securing finance,” said Marcus Grimshaw, chairman of the NACFB.
“The issue, however, is not availability of funds. It’s about awareness and access.
“Many SME lenders are specialists that don’t have a high-street presence, so it’s difficult and time-consuming for small businesses to track them down.”
Small Business Person of the Week: Rob Law, CEO, Magmatic
“We’re the company behind the Trunki suitcases for children. We launched the business in 2006, but it was a struggle to get it off the ground. While I had a clear idea about the product, getting finance was difficult – I was even turned down following a pitch on Dragons’ Den – and I ended up launching with a personal loan. We ran the business on an absolute shoestring and I lived incredibly frugally to make it work.
“The business took off quickly, but it took an awful lot of perseverance and hard work to reach profitability. Eight years on, we’ve sold more than 2 million Trunki suitcases and we employ 84 people. We’re exporting to 97 countries, but that’s only a beginning; we want to be the world’s biggest supplier of children’s luggage.
“The launch of Trunki taught me some valuable lessons and I’m now working with O2 Business to help more start-ups. We’ve done some research and discovered 2 April is, statistically, the day on which Britons are most likely to start a business – maybe because people have a chance to think over Christmas and the New Year holidays, and a common ambition is to go it alone; then they spend several months thinking about how to do it.
“My message to entrepreneurs is that while there’s a huge amount of help and information out there, there is no substitute for just giving it a go. ”