Equity crowdfunding is the answer to entrepreneurial finance failures

The growth of equity crowdfunding has been observed by the London School of Economics and Political Science (LSE), which proposed that the funding method can solve ongoing failures surrounding entrepreneurial finance.

Saul Estrin and Susanna Khavul of the LSE’s Centre for Economic Performance (CEP) led the research.

They pointed to venture capital and angel investments and highlighted the private markets can fail to recognise regional, gender and ethnic diversity. As such, small local business can fail to be recognised as much as sophisticated tech ventures.

According to the study, an equity gap of between £250,000 to £1m can be found among early-stage startups that operate in software, for example. This gap can spike significantly to £10m among capital-demanding businesses, such as high-end tech ventures.

Estrin and Khavul believe equity crowdfunding to be a “robust source of alternative entrepreneurial finance” – one that can be considered stable and predictable.

Looking to UK leader Crowdcube, the duo noted its 80 per cent share of the equity crowdfunding market in Britain, having raised £2.1m for nine firms in 2011, which has grown to over £100m and 300 companies funded.

Read more on crowdfunding in the UK:

To that end, it’s believed that crowdfunding and the digitisation of investments are the key to open the door to financial aid that has long been closed to entrepreneurs.

“The findings suggest that this new virtual market can solve the persistent market failures in funding entrepreneurial ventures,” said Estrin and Khavul.

“What’s more, this financial innovation reduces the biases in traditional forms of early stage entrepreneurial finance – such as the sector or location of the business or the entrepreneur’s gender,” they added, a nod to VC and angel investors.

Luke Lang, Crowdcube’s co-founder, said: “We’ve always known that investors are smart, and it’s great to have this confirmed by LSE. The findings quash concerns that the crowd is made up of naïve ‘dabblers’ who stampede into supporting pitches that seem popular or cool.

“Crowdfunding is a rational marketplace, with investors and entrepreneurs collaborating and sharing knowledge in a way that leads to sound, well-informed decisions.”

The world’s crowdfunding sector is set to reach $93bn by 2025, and equity crowdfunding is expected to play a key role in that growth.

Estrin and Khavel concluded: “By moving from the physical space to the digital space, equity crowdfunding engages larger networks of entrepreneurs, offering entry points across populations and locations. In the process, it may also help to socialise entrepreneurial finance.”

The UK’s equity crowdfunding industry has been so powerful and successful that it’s set to drive global tech investments alone to $8.2bn by 2020.

Image: Shutterstock

Share with your network

About Author

Zen Terrelonge

Zen Terrelonge is the deputy editor of Real Business, specialising in media, innovation, technology and the digital sector. A media professional with eight years worth of experience he has worked for both startup and established publications. He has developed contacts at a variety of businesses, from startup to household names, new entrepreneurs to well-known, including Facebook, The Body Coach, Dragons' Den, Candy Kittens, TOWIE, Gousto, Love Home Swap and HotelTonight


Real Business