Crowdfunding is the future of entrepreneurial finance says Luke Lang, co-founder and marketing director of Crowdcube – the equity-based crowdfunding platform for start-ups and small businesses.
Business Secretary Vince Cable has announced steps to create a new taskforce to boost the future of business finance for SMEs, including a focus on crowdfunding. The taskforce’s raison d'Ãªtre will be to examine the challenges facing small businesses seeking finance options and improve access to finance for small businesses. In Vince Cable’s own words, “I want to see as much competition in the market as possible and for businesses to have access to a wide range of finance sources.”
The UK taskforce follows President Obama backing a crowdfunding revolution in the US with the Obama administration and Republican lawmakers drafting legislation that allows ordinary US citizens to pool their money together to back an entrepreneur or business. The U.S. Securities and Exchange Commission (SEC) is looking to revamp the rules as it seeks to keep pace with emerging models and public demand.
Such political moves in the UK and US are founded on a continued failure to stimulate bank lending and a growing frustration from entrepreneurs who cannot access the finance they need to start and grow their businesses. A lack of access to finance however is no indication of a lack of entrepreneurial spirit. Recent figures from Google state that searches for “small business loan” are up by 34% and “business plan UK” up by 60%.
And while there is a distinct need for finance from all types of small businesses, it is start-ups that seem to fall under the radar of most funding initiatives. Indeed, finance remains the greatest hurdle for entrepreneurs. Banks continue to adopt a no-risk approach to lending to start-ups (despite the levy placed upon them to lend more to small businesses) and business angels and VC funding are as difficult as ever to access.
Turning to the crowd
Turning to the general public for support via crowdfunding is one answer that seeks to democratise investment and give Start-Up Britain a much needed boost.
Crowdfunding enables businesses to seek funding from a ‘crowd’ of ordinary people. This web-based model lets entrepreneurs showcase their latest invention or project online using a Dragons’ Den style pitch to attract investment. A hit with the creative industries where struggling film makers and bands have turned to their fans to support them, many of the early crowdfunding websites provide personalised rewards in return for financial support.
A more recent development is equity-based crowdfunding. Crowdfunding websites provide people with a real stake in the business and share in any future successes. As soon as the business reaches its target fund, investors receive their share certificate.
Crowdfunding challenges conventional funding models by democratising investment, turning ordinary people into investors who pool small amounts of money (often as little as Â£10) in support of an idea, person or business. It aims to make access to finance easier. Instead of competing for limited business angel, government grants or venture capital funding, start-ups can use crowd sourcing sites as a platform to connect with a nation of ‘armchair dragons’ to find investment.
Business crowdfunding success stories
One example of a company that’s used the model is Fairtrade body care business Bubble & Balm. It raised Â£75,000 of growth capital earlier this year in return for 15 per cent equity in the business.
is Personal Development Bureau which raised Â£25,000 of seed capital for 15 per cent equity. The capital will help finance the development of a business that helps the growing numbers of British police, fire service and other forces personnel to cope with unemployment.
Kammerling’s, the brand behind a unique ginseng-based alcoholic spirit, had a more ambitious target of Â£180,000 which it got from 85 ‘armchair’ investors to ensure the next stage of its expansion.
More recently the owner of some of London’s best loved bars, The Rushmore Group, satisfied its thirst for expansion with record crowdfunding investment of Â£1 million from 143 investors.
These four small companies are the precursors of what I predict will become a major financial tide in the coming 12 months and it’s good that Vince Cable recognises the gap in the market.