Crowdfunding: Bridging the Business Funding Gap
Updated: Aug 2, 2019
At a glance
- Latest data for crowdfunding in the UK shows that in 2018 366 equity-based crowdfunding deals were completed, with a total investment of £271.3 million. (Beauhurst, 2018)
- The top equity-based crowdfunding platforms for 2018 were Crowdcube, with 168 deals completed and £143.2 million in investments, followed by Seeders, with 158 deals completed and £81.8 million in investment, and Syndicate Room, with 35 deals completed and £25.1 million in investment. (Beauhurst, 2018)
- The four primary types of crowdfunding are known as reward-based, donation-based, equity-based, and lending-based (also known as peer-to-peer, or P2P, lending) crowdfunding.
In the decade since the financial crash, there has been increased lending regulation, which has made it increasingly difficult for businesses to secure funding. This has led to many businesses to turn to alternative funding sources such as crowdfunding, resulting in an increase in the number of crowdfunding platforms. A British Chambers of Commerce survey published in July 2018 revealed that 63% of businesses with fewer than ten employees had not sought any type of funding in the last year, compared to 39% of businesses with more than 50 employees that had not sought funding for their businesses. This survey illustrates that while funding is available in the form of crowdfunding, smaller businesses are less likely to seek funding for their business than larger businesses.
Beauhurst, a data analytics firm based in London, recently published their equity investment market update for 2018, that there was a total of £7 billion invested in UK companies, through 1572 equity investment deals, in 2018. £271.3 million of that £7 billion was through equity-based crowdfunding platforms. That £271.3 million pounds was invested in 366 businesses that pursued and successfully secured crowdfunding last year, they were rewarded with a total of in new capital for their businesses. The remaining £6.7 billion investment was made by private equity firms, venture capitalist firms, government agencies, angle investors, corporate investment schemes, and university investments. These sources of funding usually require presentations, business acumen, and a high quality business plan, whereas crowdfunding tends to be an easier process for businesses.
One of the best British examples of how crowdfunding can benefit a business by helping them to realise growth and expansion possibilities is Brewdog. For the sixth time in nine years, Scotland-based Brewdog, founded in 2007, is seeking a new £7 million investment from crowdfunding as it looks to continue business growth and expansion. That would bring the total amount of funding raised since the firm’s initial equity crowdfunding round in 2010 to £67.9m, from 99,000 investors. This highlights that, for businesses that are bold enough to step into the world of crowdfunding, the rewards can result in large benefits for their business.
While many businesses don’t seek any type of funding for their businesses, whether it be through traditional or alternative sources, the crowdfunding results that businesses have achieved have proved that funding is available, businesses only need to tap into it.
What is Crowdfunding
Crowdfunding is the term given to the type of fundraising wherein businesses look for funding from the people around them, a crowd, rather than through traditional funding channels such as bank loans or grants. This results in the raising of a large sum of money through the amalgamation of smaller sums of money, rather than a large sum of money from a single source.. There four main types of crowdfunding;
Reward-based – Investors contribute money towards businesses in return for a non-financial reward, usually a product or service.
Donation-based – Investors will donate money towards non-profit businesses and charities. Under this type of crowdfunding investors receive no financial, product, or service-based reward for their investment.
Equity-based – Investors contribute money towards a business in return for an ownership share and the expectation of profit sharing or dividends being paid.
Lending-based – In this scenario, also known as P2P or peer-to-peer lending, Investors contribute money towards a business in the form of a loan with the expectation of the amount to be paid back in full, including interest.
Crowdfunding is not just a way of securing funding for a business, it is also a way of building a community of future supporters and engaged followers who are passionate about the business and its product or service offering. Therefore, crowdfunding shouldn’t be seen as merely a means to fund your business, but also as a marketing campaign to build momentum towards the launch of the product or service.
Choosing the right crowdfunding platforms
As of February 2017, there were 65 active UK-based crowdfunding platforms that were registered on the CrowdingIn directory developed by NESTA. While this was not an exhaustive list, it is an adequate sample size with which to draw conclusions about the UK crowdfunding industry. The top crowdfunding platforms used by UK businesses for investment in 2018 were Crowdcube, with 168 deals completed and £143.2 million in investments, followed by Seeders, with 158 deals completed and £81.8 million in investment, and Syndicate Room, with 35 deals completed and £25.1 million in investment. There are hundreds of other platforms, some of the most popular being Kickstarter, Indiegogo, and GoFundMe, and they all have their advantages and disadvantages. Crowdfunding platforms will offer funding based on at least one of the four crowdfunding models, and many platforms will offer more than one model. The four crowd-funding models are...
According to NESTA, 22% of crowdfunding platforms offer this model but it accounts for only 2% of the total money invested using crowdfunding. Some of the biggest lending-based platforms are Crowdfunder, Indiegogo, and Kickstarter. The average commission these platforms will usually charge is 5% of the total amount raised.
According to NESTA, 23% of platforms offer this model, but it only accounts for 1% of all money invested using crowdfunding. Some of the biggest lending-based platforms are GoFundMe, Crowdfunder (offers campaigns the ability to accept donations along with other types of investment), and Leetchi. The average commission these platforms will usually charge is 5.9% of the total amount raised.
According to NESTA, 31% of crowdfunding platforms will offer this model and makes up 10% of the market in terms of the total amount invested. Some of the biggest lending-based platforms are Crowdcube, Seedrs, and Syndicate Room. The average commission these platforms will usually charge is 5.3% of the total amount raised.
According to NESTA, this the most popular type of crowdfunding model and is offered by 42% of platforms on CrowdingIn, and in 2015 invested the largest amount of any model, 75% of the total amount invested. Some of the biggest lending-based platforms are Funding Circle, RateSetter, and Zopa. The average commission these platforms will usually charge is 3.6% of the total amount raised.
Figure 2 illustrates the breakdown of market value by crowdfunding model and shows the large amount that lending-based models invest in comparison to the others. For business looking for finance, there will be more lending-based crowdfunding available. This could result in there being more competing funding campaigns, making it more difficult for businesses to stand out and succeed in securing funding. Due to this, businesses should consider another crowdfunding type if it coincides with their business and funding strategy.
Choosing the right crowdfunding platform comes down to matching the investment specialism of the crowdfunding platform to the type of crowdfunding investment sought by the business. As each platform will charge a different amount of money for use of their platform, the amount that you will have to pay a platform out of your raised investment total should factor into the choice of crowdfunding platform.
Advantages of Crowdfunding
Speed: On most online platforms, the speed with which businesses can set up a campaign profile and start earning investments, takes less time than it would traditionally take to go to a bank and apply for a business loan; making crowdfunding a very attractive funding alternative.
Accessibility: Crowdfunding platforms have opened up the world of investments to thousands of businesses, as they no longer need to make presentations to large investment firms or venture capitalists or be business experts to secure funding. While business plans aren’t required, the most successful crowdfunding campaigns usually will have one.
Marketability: Once a campaign page is established, businesses can focus on increasing the number of investors and build early momentum by utilising SEO, branding, videos, and other marketing content.
Feedback: When going through the crowdfunding process, businesses are giving investors (and potential future customers / clients) information on the product or service. As people learn about the campaign and / or invest they will usually provide feedback, which businesses can use to improve their product or service offering.
Disadvantages of Crowdfunding
Competition: Once a business’s campaign is accepted to a crowdfunding platform, it faces the immediate challenge of standing out from the rest of the campaigns currently active on the platform. A robust business plan and marketing strategy can help businesses convey the right message to potential funders, helping them stand out and secure investment.
Funding Threshold: Some crowdfunding platforms require that businesses set a threshold for the campaign that, if met by a certain date, will deem it to be “funded”. Some platforms will stipulate that unless the threshold is met by the deadline the business will not keep any of the money, whilst other platforms will let companies keep whatever money has been raised. It’s important to understand the difference in the funding stipulations and choose the best option for your funding campaign.
Fees: All crowdfunding platforms will charge a fee; how they charge, the amount they charge, and when they charge it, will differ from platform to platform. Businesses should factor this in to their decision-making process, in selecting an appropriate platform for their funding campaign.
Information Leaks: By creating a funding campaign that lists in-depth product or service information for investors, it will also make that product / service information available for anyone (including your competitors) to view. Businesses should be careful not to disclose information or materials that risk your potential to secure intellectual property (IP) rights or make it too easy for others to replicate your specific product or service offering. It may be necessary to secure IP protection for your products, services or brands prior to commencing a funding campaign.
If your business is looking for funding opportunities to help your business grow, contact us and we will help you navigate through the different offerings available to find a funding option that fits your business needs and goals.
Strathearn Strategic Consulting
+44 (0) 7913 413 699