It’s a growing source of finance for businesses around the globe, so could crowdfunding be an avenue for you to explore in 2014?
What is crowdfunding?
Crowdfunding is the collective name for the practice of funding a project or venture by raising many small amounts of money from a large number of people, usually through a website, known as a platform.
A recent report from Nesta, published in December 2013 cited the equity crowdfunding market had raised £28m for UK businesses in 2013 and is experiencing significant growth.
There are four main types of crowdfunding:
- Reward-based: the most common kind, which accounts for 43% of the total market share. Money is raised through a website platform and backers of projects receive a reward in return.
- Donation-based: which accounts for 29% of the total market. Money is gifted to a good cause for no expected return.
- Equity-based: this accounts for just 15% of the total market share, but is the model that raises the most funds per project. An investment is made directly or indirectly into a new or existing business, usually in the form of buying shares or debt securities.
- Loan-based crowdfunding: also known as peer-to-peer lending, accounting for 13% of market share. As the name suggests, under this model money is lent and interest charged.
Luke Lang, co-founder of equity crowdfunding service, Crowdcube, says: “Equity crowdfunding makes raising finance accessible and straight-forward and puts an entrepreneur firmly in control of their business, rather than ceding control to a single angel investor.”
There are over 50,000 investors registered on Crowdcube, which has raised more than £16.5m for over 80 UK business pitches since launching in 2011. This makes it one of the biggest and most successful angel networks in Europe. In 2013 it has raised over £12m – a 550% increase on 2012.
One of the concerns surrounding crowdfunding in the past has been the lack of structured regulation, but Lang points out that this is why companies such as his are leading the way.
“Regulation is vital for the long-term development of the equity crowdfunding market, which is why Crowdcube is authorised and regulated by the Financial Conduct Authority (FCA),” he says.
“The FCA is currently conducting a public consultation on proposed new rules and policies that govern equity crowdfunding to create a new bespoke framework, which balances investor protection with regulation and enables the crowdfunding to grow responsibly.”
And it isn't just the company looking for investment that can benefit.
“Historically, to be an angel investor you needed to be extremely wealthy, with time on your hands. Now you can get started with as little as £10. You review the pitches available on the website and invest online. This has helped to transform the funding scene, and it’s working,” Lang explains.
By democratising investment, equity crowdfunding removes many of the barriers and stereotypes that exist in traditional angel investing. This, Lang argues, provides the benefits of angel investing, with investors able to receive the voting and pre-emption rights that they expect, but makes the whole process more accessible and rewarding, without the middle man.
You can also take a look at the Financial Services Authority's view on crowdfunding