CROWDFUNDING started in the 1990s and aimed to bring together people with similar interests to fund a project or business. Since 2008, however, following the decline in bank lending to small businesses, it has found a new face. Large numbers of private investors are linking up through online platforms to companies – usually early stage start-ups. But is this a feasible concept for entrepreneurs and investors?
REGULATION REGULATION REGULATION
Jeff Lynn is chief executive of one such platform – Seedrs – and is optimistic that the concept will succeed. A former corporate lawyer at Sullivan & Cromwell in the US, he came to do an MBA in Oxford with a view to working in entrepreneurship. By late 2008, he and the company’s chief operating officer Carlos Silva had noticed the advent of peer-to-peer lending. After establishing that the technology could also work for start-ups, they obtained FSA regulation, a long – but doable – process. “But if there’s one thing financial regulation is there for, beyond perhaps protecting bank deposits, it is to regulate the way you offer shares in unquoted companies to a wide group of investors,” says Lynn.
But he had another concern: the fear that this is a high-risk asset class, and “you don’t want the proverbial widows and orphans” losing their money. Seedrs responds to this by asking potential investors to complete a questionnaire, to show they understand the risks involved. They have had 4,500 people join as authorised investors on their platform in the six months they’ve been live. So is this a good option for entrepreneurs who may struggle to find funding elsewhere?
WHO IT COULD WORK FOR
The start-ups that approach Seedrs are almost always those who wouldn’t get a bank loan. “But it’s high-risk, high-reward businesses that we’re looking for”. To qualify, entrepreneurs have to complete a bespoke form that addresses the three things Seedrs sees as most important to investors: what’s the idea, who’s their market, and who’s the team behind it. They review each form like an investment bank would verify a prospectus: is it fair, clear, and not misleading? “We’re not looking to see if it’s a good business. We let our investors make their own decisions.”
Of the 80 to 90 companies that have been listed, 12 are now fully-funded. After only a few months, of course, it’s too early to say whether they will succeed or fail. “But risk always comes with failure. There must be risk because otherwise someone else would have done it already”. I ask why they believe some start-ups don’t succeed. “In my experience, there are two key reasons,” says Silva. “The first is a lack of focus early on. The second is the simple fact that not everyone is necessarily a good entrepreneur.”
Lynn believes a consolidation of the market is forthcoming, and he wants to make sure Seedrs has a seat at the table. “More and more crowdfunding companies are cropping up. But we’re the first to be regulated, and the fastest-growing in the UK.”
Nonetheless, he is uncertain of crowdfunding’s future. “I worry about the cowboys who could spoil it for us all. And this is a very high-risk asset class, many businesses will fail, and if those failures aren’t handled right, or investors aren’t properly briefed on the risks, there could be issues.” Despite his reservations, Lynn sees the concept of people putting their personal money behind businesses that interest them as the state of nature. And he believes that the notion of online intermediaries facilitating essentially direct transactions between providers and recipients is “the future of finance”.
Crowdfunding can certainly help entrepreneurs raise funds when they need it most, so let’s hope the “cowboys” don’t ruin it. Because, as yet, it isn’t widely seen as a credible alternative to banks or venture capitalists.
CV JEFF LYNN
Company Name: Seedrs Limited
Founded: 2009 (launched 2012)
Company Turnover: Negligible (VC and angel funded)
Number of staff: 15
Job Title: Chief executive
Born: New York City
Studied: MBA, Said Business School, Law at Pennsylvania, Virginia and Oxford
Drinking: Peaty single malts, Tennessee sipping whiskey
Reading: The Gentry, by Adam Nicholson
Favourite business book: When Genius Failed, by Roger Lowenstein
Talents: Expert stir-fry maker
Motto: Disce ut semper victurus, vive ut cras moriturus - “Learn so that you may always succeed, live as if you will die tomorrow”
First ambition: Being a trial lawyer for criminal cases
Heroes: Charlie Merrill, Lady Thatcher