Has crowdfunding now grown up?

Crowdfunding has evolved significantly over the past few years and has already helped companies raise in excess of £20bn of funding.

Crowdfunding is where a large number of investors come together to each contribute varying amounts of capital to a business or project. Whilst popular, however, crowdfunding is still criticised as a high-risk investment strategy; the FCA website acknowledges most investments are start-ups and the majority “will result in 100% loss of capital as most start-up businesses fail.”

As a result, the FCA implemented new regulations about who can invest in equity and loan-based crowdfunding ventures to help provide some protection to smaller investors, without prohibiting businesses and individuals from participating in crowdfunding. The jury is currently out as to whether the current regulation is enough and unfortunately we will only know when there have been some high profile failures.

Is this funding strategy suitable for owner managed business? Potentially it could be.

Despite the risks, this funding option is growing in popularity, with some international crowdfunding success stories including Oculus VR, which raised $2.4m on Kickstarter for its virtual reality headset in 2012, and subsequently sold to Facebook for $2.0bn in 2014.

Over the last few years, access to traditional funding routes such as banks or equity investment has been limited due to the economic climate but the tide is now turning for most companies as funding becomes more readily available. Crowdfunding should be considered alongside other more traditional funding routes, but it is not for everyone. 

Whilst there are a number of crowdfunding platforms, finding the right one for you can be difficult. You also need to be prepared for having a long list of potentially inexperienced shareholders who you will need to communicate with each year. Being clear upfront as to how you will communicate with shareholders will help you manage your shareholder base after investment. Crowdfunding is an attractive option for start-up businesses, such as Oculus VR, where traditional funders may consider them too early stage. 

Other areas which need consideration include a lack of control over the process and investor selection, the funding success being linked to the reputation of the crowdfunding provider and access to willing and suitable investors. One sector which can find crowdfunding very attractive is the retail market. Anyone looking to attract new retail customers can use a crowdfunding round to market itself to a new customer base. Crowdcube recently took advertising space on the London Underground for some of its investee companies, such as Chilango, LOVESPACE and Zero Carbon Foods, which will have attracted both investors and potential new customers.

Moore Stephens provides specialist advice in selecting appropriate funding routes. To learn more about available funding options for your business, please get in touch with one of the team.