Crowdfunding: Enter the disruptive finance revolution
The funding situation for British startups has changed irrevocably since the global financial crisis. Equity crowdfunding has quickly become an important funding mechanism for many small businesses and is now a major part of the UK’s entrepreneurial finance landscape.
Currently valued at £146m in 2015, this is almost double the figure for 2014, and is likely to double yet again next year, if past trends are anything to go on. The growth of this new form of finance has been so strong that researchers have struggled to catch up with the speed with which the entrepreneurial finance market is changing.
To address this situation, we undertook the first ever study of the demand for equity crowdfunding in the UK. We interviewed 42 British startups that had raised funding via equity crowdfunding platforms to explore the reasons firms seek this form of finance and what impact it has on them. It is important to note that there is a large degree of divergence in the types of firms different platforms attract, the nature of their investment process (investor-led versus firm-led), due diligence, timescales, investor profiles etc. Therefore, while platforms like Crowdcube and the Syndicate Room both fall under the same banner of equity crowdfunding platforms, their modus operandi is fundamentally different. This heterogeneity means care is needed when generalising about the demand for equity crowdfunding.
So what is its main appeal? Firms were primarily attracted to the “speed” with which funding can be raised – often a matter of weeks – and the lack of “strings attached”. Most of them had not considered banks as a source of startup or growth funding – let alone made an approach.
A similar situation emerged with other sources of entrepreneurial finance, such as venture capital (VC) and business angels. This was owing to a number of reasons, including discouragement, company valuation, the desire to retain autonomy, and a wish to raise the most funding possible in the shortest amount of time. Many felt crowdfunding offered a “better deal” in terms of company valuation than VCs or business angels.
The types of firms seeking this “fast money” were very young, small and often pre-revenue, with the majority operating in sectors such as digital media, food and drink, fintech and transport. For the most part, B2C firms were more prevalent across the main platforms than B2B firms. The companies we looked at raised on average £408,000, issuing on average 19 per cent equity. This suggests the amount of finance obtained has roughly doubled since the 2012-14 period, and that firms are now able to access growth finance rather than purely startup capital.
We also uncovered a number of important intangible benefits arising from crowdfunding. Entrepreneurs liked the fact that it led to a valuation of their business, and many welcomed being made accountable to new shareholders. Many others sought “validation” of their business concept and business model from the crowd. They also benefited enormously from the media exposure they received from the crowdfunding process via their campaigns – this in turn can bring in further potential investors. Thus, the benefits of crowdfunding appear to be cumulative and “more than just money”.
Our work suggests that many entrepreneurial startups no longer view banks or existing sources of entrepreneurial finance such as VCs and business angels as their main source of funding. However, it is important to note that many specialised investors invest alongside the crowd. Indeed, there seems a growing number of “angels in the crowd”.
In sum, the scale in which this source of funding has grown, coupled with the impact it is having on both British startups and investors, suggests that equity crowdfunding is fundamentally changing the entrepreneurial finance market. While some think tanks have labelled crowdfunding as a type of “alternative” finance, perhaps a better term to describe this phenomenon is “disruptive finance”, given its transformational role in reconfiguring the entrepreneurial funding landscape.
When it comes to longer-term impact, we think that what we’ve seen so far could be the tip of the iceberg. However, icebergs can sink ships. Therefore, while providing a vital new source of startup funding, equity crowdfunding raises a number of thorny issues in terms of investor returns, investor protection, sustainability and the need for proper regulatory safeguards.
We hope to see a more critically informed discussion about these issues in the future.