10 Jun 2015
Adam Bernstein
Job Title
Coined a few years ago, crowdfunding refers to the process of seeking and raising finance from a large number of individuals, each of whom commit to give a small amount of money, often as little as £5.
The process is very distinct from the traditional bank funding method where a large number of people apply to a few institutions for funds. This about turn is changing how banks and funding interact.
According to the UK Crowdfunding Association, its online roots lie – like many things – in music. It was British rock group Marillion who, in 1997, needed $60,000 to fund a US tour. With the first online platform appearing in 2001 and hundreds more available now, the creative industries including film and publishing are now heavily into crowdfunding.
But the process is moving into other sectors. A report titled The State of the Crowdfunding Nation by UK-based The Crowdfunding Centre showed during each day in March 2014 there were 442 crowdfunding campaigns launched and £40,000 per hour was raised globally.
There are three main categories of crowdfunded finance:
Here, lenders give because they believe in a project and not because they specifically want a return. So instead of interest they may receive publicity, tickets to an event or a notional gift. For them it’s the thought that counts.
An investor’s reward is the interest returned on top of the money they lend. This form of lending is popularly known as “peer to peer” (P2P).
Investors exchange cash for equity (shares) in a business. But just like shares, the value can rise or fall.
Those seeking funds via crowdfunding need to choose the category and platform to pursue. But before choosing the platform, borrowers first need to consider the amount needed to determine the type of borrowing they need.
US-based Crowdfund Insider reckons, albeit in US dollars, donations are good for amounts under US$10,000, rewards work for sums between US$10,000 and US$100,000, debt should be used for loans of US$25,000 to US$100,000, and equity is ultimately for sums between US$250,000 and US$3m plus.
Crowdfund Insider also notes rewards have proven successful for the arts, charities and gadget/new technology ventures; that equity works for hot startups and firms expanding; while lending – P2P – seems well suited to high street businesses that have hit the expansion phase after two or more years.
In picking the platform on which to post a funding request, the advice is that firms should do their research while looking for reliable track record information by asking questions such as:
Often investors may want more detail about a business than that presented on the crowdfunding site. With email demanding instant answers it helps to do some prior research on crowdfunding forums to get a sense of the questions that may be sent. One favourite is asking how a firm has come up with its valuation. Prior preparation helps answer questions quickly and well.
Borrowers should make it easy for investors by offering an opportunity for online investors to hop off the fence and invest before they get distracted by something else. Speaking, where possible, to potential investors in person allows useful insights into their background and experience and what they can bring the business should they invest.
Not everyone will know what crowdfunding really is, and nor will they be aware of the Seed Enterprise Investment Scheme (SEIS) tax break. By investing in a firm that qualifies for SEIS, they will receive 50% of their investment back through tax breaks. Explaining these terms may help secure funds.
While it’s vital to keep a close eye on email to be as responsive to investors as possible, it’s also important that borrowers keep all the other plates spinning in the business too. Webpage watching isn’t going to gain funding – it’s better to entice investors in with new developments in the business.
There are a large number of lending platforms with an equally large variance in costs. However, a good summary of interest rates can be found online; they vary between 3.2% (Zopa) to 9.02% (Funding Empire).
Apart from being a potential investment vehicle for those with spare cash, crowdfunding can help businesses in need of funds.
And in terms of the veterinary world, crowdfunding is starting to take off. A story posted on vmdtechnology.com entitled “Vets, pets, and the crowd” details how projects such as a facial recognition cat feeder raised US$240,000 against a US$100,000 goal, a Fitbit for dogs raised US$81,000 against US$35,000 sought, and a mobile-controlled treat dispenser raised US$251,000 against US$100,000.
Pet owners needing finance are using crowdfunding too. Tony Warburton needed to fit his dog Alfie, who has a heart condition, with a pacemaker. Within days he had £4,000 from 252 people.
Another example, 4legsonline.co.uk, is currently seeking £8,000 to develop ”a successful business focused on premium dog and equine products and services made in the UK”. The business currently sells its own brand (Ferndale) along with other horse and dog brands. There is no physical location for the business and orders are fulfilled directly from individual suppliers.
