For the entrepreneur, raising finance is a constant priority. A new idea, after all, is only as it good as the investment it attracts. Endless hours are spent perfecting pitches, manning convention stands, and trailing in the wake of business angels – all in the hope of securing the vital funding needed to bring your business to life.

Over the last decade, technological advances and economic recession have shaken up the old funding formula. As bank finance has dried up substantially – especially for early-stage, high-risk businesses – new capabilities have arisen in financial technology (‘fintech’). The result has been the emergence of new pathways to finance such as crowdfunding, which harnesses the power of the internet to channel small donations, loans or investments into growing businesses en masse.

In the world of crowdfunding, the average investor is likely to be the everyday customer of a high street bank who is reallocating their cash in search of an alternative to record-low interest rates. Professionals and large institutions are also becoming increasingly involved. Between this group and the business in search of funds stands a crowdfunding platform – a regulated entity that raises money, arranges investment, and promotes the business on its behalf.

Interested in learning more, or finding out whether crowdfunding might be the financing option for your business? Read on for a whistle-stop tour.

The crowdfunding sector in the UK

Crowdfunding, in the broadest sense of the term, encapsulates three distinct models of raising finance – donations or rewards-based crowdfunding, peer-to-peer lending, and equity crowdfunding. A range of different platforms operate in each space, and sector coverage varies broadly.

Donations or rewards-based crowdfunding is perhaps best known for facilitating ‘fan financing’ – that is, the funding of projects or products using contributions amassed from a loyal or long-standing supporter base. The key principle across this strand of the industry is that returns are non-financial. In other words, ‘investors’ (or more appropriately, donors) receive no financial benefit after parting with their money, and either make a gift to a cause or business, or redeem a reward in the form of, say, a prototype product, an experience or a voucher. Well known donations or rewards-based platforms include sites such as JustGiving and Kickstarter.

Peer-to-peer lending, or P2P, on the other hand, is – as it sounds – a debt-based method of financing. It involves individuals lending to either other individuals, or to businesses. Like any conventional loan, these are repayable after an agreed period of time, along with interest. Leading platforms include Zopa and RateSetter. 

Equity crowdfunding, finally, involves investors purchasing shares in early stage businesses. These are transferable (they can be bought and sold in secondary markets), and will fluctuate in value according to the business’ performance and market appetite. Crowdcube and Seedrs are two of the most widely known equity crowdfunding platforms.

Crowdfunding in the UK is serious business, fuelling around 12% of all business investment and amounting to £3.2bn of financing in 2015[1]. P2P takes up the largest slice of the pie, lending £1.49bn to UK SMEs (which does not take into account almost another billion pounds lent to individuals). Equity-based crowdfunding facilitated £332m of share acquisitions over the same period, representing more than 15.6% of UK seed and venture-stage equity investment. Donations and rewards is the fastest growing area, with £12m pledged in 2015.

Crowdfunding your business

For those looking to raise finance, crowdfunding could be a valuable option to consider. Which of the three main types is most suitable for your business will depend on its exact nature, your growth strategy, and ultimately your appetite for taking on debt, giving away equity, or raising contributions from existing supporters. The UK Crowdfunding Association, a leading industry body, represents the full breadth of platforms and is a great place to go to find out more. While some crowdfunding platforms are specific to certain industries, most are product and sector agnostic.

Fancy joining the more than quarter of a million businesses and individuals that raised funds via crowdfunding last year?[2] Read on for our three steps to success.

  1. Pick the right type of crowdfunding for your business. Donation/rewards, debt or equity. Consider factors such as the business’ stage of development, whether or not your product or service has an existing fan base or supporter community to draw on, and your appetite for releasing equity or taking on debt. Crucially, consider whether your business proposition is marketable to a general audience – for a business to successfully raise funds, it has to be capable of engaging and motivating large numbers of people.
  2. Select a platform and make an application. Different platforms – even within the same broad segment of the industry – operate slightly differently, and may charge different fees, market your business in a particular way, value it differently, or provide varying levels of support with on-boarding, legal and administrative matters, or with issues faced post-raise. Make sure you do your research, and once satisfied, put in an application to be taken on board.
  3. Support the platform in marketing your business. Before a platform accepts your business, it will need to see extensive details of your proposition, including your business plan, financial projections, and details of key team members – and to verify this information in order to comply with its own legal obligations. Provide as much information as possible, and if accepted, assist the platform in crafting the best pitch to represent your business. Once your raise is live, spread the word of the investment opportunity throughout your network – though be careful not to publish adverts or inducements to invest unless granted specific clearance from your host platform.

Whatever platform or method of crowdfunding you choose, all the best on your journey to harness the power of the crowd!


[1] Pushing Boundaries: The 2015 UK Alternative Finance Industry Report, University of Cambridge and Nesta

[2] Pushing Boundaries: The 2015 UK Alternative Finance Industry Report, University of Cambridge and Nesta

 

BWB Compliance was launched in May 2016 and provides specialist regulatory advice and hands-on support to FCA regulated firms. The consultancy was recently awarded the Most Promising Start-Up Business and is headed up by Gillian Roche-Saunders, an experienced compliance consultant with a track record in providing award-winning support to financial services firms. Its range of support covers everything from governance, suitability and appropriateness, financial crime controls, client money and financial promotions. 

Andrew Dougall is a regulatory consultant at BWB Compliance who specialises in advising crowdfunding, peer-to-peer lending and alternative finance businesses. He works closely to support the industry’s leading trade body, the UK Crowdfunding Association.


Posted on 21/02/2017 in Legal Updates

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