Crowdfunding as a source of investment been around since 2008, driven by the ongoing development of the internet and the low interest rates prevailing since the financial downturn pushing investors to seek higher returns. It is now a well-established part of the funding environment, with several large companies dominating the sector but a host of smaller companies joining all the time to take advantage of particular niches. This article gives a very brief look at what’s involved in raising funds through crowdfunding, some of the key features of crowdfunding platforms and a few examples of some of the key players.
Firstly, one of the most important features of crowdfunding organisations is the type of funding they offer. This falls into three groups – debt, equity and rewards. Debt funding will have a range of payback terms and interest rates depending on the perceived creditworthiness of the investment. Rewards-based funding is typically aimed at B2C companies with products or services of interest to investors which are provided instead of a financial return – cultural events, games, restaurants etc.
Second different platforms will offer one of two models of funding – all or nothing or ‘keep it all’. In the former, the entrepreneur needs to raise all funds required – if the goal isn’t reach, no funds are collected. By contrast, the keep-it-all model, whatever is collected is handed over to the entrepreneur and its then up to him or her to either develop the business with what’s been raised or had funds collected back to the investors.
Thirdly, lending criteria vary from one crowdfunder to another. Funding Circle for example, one of the best established crowdfunders in the UK, requires a turnover of £50,000 and two years of filed accounts. Seedr on the other hand, focuses on providing equity seed capital to start-ups.
And fourth, crowdfunding companies themselves will take a fee for putting the bid together – 7.5% of the amount raised is typical.
A typical crowdfunding round will require the entrepreneur to provide the crowdfunding platform with a business plan (usually structured to the crowdfunders template). This is then assessed and if approved, the entrepreneur is given a fixed timescale to raise his or her funds.
Here are a few of the larger crowdfunding platforms in the UK:
- Funding Circle was founded in 2010 and to date has arranged investments of over £640m with 40,000 investors. Funding Circle is more a peer-to peer lender than a straightforward crowdfunder. The average loan is £60,000 but can be from £5,000 up to £1m The borrowing period can be from six months to five years and the interest rate varies according to credit-rating from 8% to 18%.
- Crowdcube. Launched in 2011, Crowdcube has so far funded £112m of equity and debt through 216,000 investors. It was the second crowdfunding platform in the UK approved by the Financial Services Authority in 2013. Crowdcube charge a fee of 6.5% of the amount raised and the average amount raised is £187,000.
- Seedrs. Focussed specifically on start-up companies looking for seed capital, Seedrs was founded in 2012 and was the first UK crowdfunding platform approved by the FSA. Amounts raised range from £10,000 to over £500,000 with the average being £160,000. There are typically 10 investments per month and Seedrs is an all-or-nothing platform and charges a fee of 7.5% of the amount raised.
Crowdfunding is now a well-established alternative/complement to business angel funding and for the larger platforms, can take the place of established Venture Capital providers. For further information or help with raising investment through crowdfunding, please get in touch.