Investment crowdfunding – also known as equity crowdfunding – has come a long way in just five years. Despite its relative infancy, the industry grew 410 per cent between 2012 and 2014 according to Nesta, and is estimated to be worth £84m. Crowdcube is on course to facilitate more than £100m of funding through its platform in 2015 alone.Originally billed as an “alternative” funding route, largely suitable for startups looking to raise seed capital, crowdfunding is now recognised as a mainstream finance option. Hundreds of businesses of varying sizes and at different stages of growth have successfully raised funds, while the profile of investors has evolved. Investment crowdfunding has come of age and as the industry grows, not just in size but also in stature and confidence, and finds itself at a tipping point.
Bigger names and bigger raisesThe rapid pace at which investment crowdfunding has grown may initially have been driven by startups unable to access finance through traditional routes, but today a broad range of businesses are choosing this approach. Some 75 per cent of funded businesses on Crowdcube are growth or early-stage ventures, for example, while only 25 per cent are startups. Far from being a “last resort”, crowdfunding has become the first choice for a number of larger or more established businesses – including the likes of Chilango, River Cottage and Eden Project. And the amounts being raised are getting higher. JustPark, which connects owners of unused parking spaces with drivers looking for a spot, recently raised a record-breaking £3.7m from 2,900 investors – tripling its target. These impressive totals are helping to attract seasoned business people and serial entrepreneurs to crowdfunding, including Poundland’s Steve Smith, who completed two funding rounds totalling £1.7m for his latest venture Estates Direct, and easyJet founder Stelios Haji-Ioannou who raised £1.3m for his new business, easyProperty.
Old and new finance options are coming togetherThere’s a real sense that the old and the new in investment circles are starting to come together, heralding an era of co-operation and collaboration. As more high-profile names and companies that are comfortably into their growth stage become involved, we see examples of “the crowd” being added to a business’s existing angel, venture or institutional investors. JustPark, for example, already had the backing of BMW iVentures and Index Ventures, the team behind Skype, Dropbox and JUST EAT, when it decided to crowdfund. These businesses do have access to traditional routes to finance – but have recognised that crowdfunding gives them a platform to reach a wider pool of potential investors, as well as the ability to engage existing customers while attracting new brand advocates. Read more about crowdfunding:
- Why the UK’s newest crowdfunding firm is aiming investors at emerging markets
- The best of both worlds? Financing a £30m venture capital firm with crowdfunding
- Older demographics are the biggest fans of crowdfunding
An option for every sectorThe diversity of businesses looking to the crowd for investment is a real demonstration of its accessibility and appeal. Businesses from the tech and food and drink sectors have always been popular, but investors have shown they have an appetite for a variety of propositions, from the unusual and highly innovative – such as Sugru, the world’s first mouldable glue which has already raised over £3m from more than 2,300 investors – to those with a social, economic or environmental impact. Nor does the crowd shy away from businesses that solve more complex problems. Biotech company Cell Therapy, which has developed a breakthrough stem cell medicine to treat heart failure, successfully raised £691,000 on Crowdcube earlier this year from more than 300 investors in just 10 days.
A changing investor profileIt’s not only the businesses looking for investment through crowdfunding that are evolving; so are the investors. One of the most refreshing things about crowdfunding is its democratisation of an opportunity that was once only accessible to an elite few. This isn’t going to change – but the members of the public who found themselves able to invest in business for the first time have been joined by professional investors, business angels, venture capitalists and even government-backed investment funds. Crowdfunding investors are savvy. They know building a diversified portfolio of investments will spread the risk and increase their chances of backing a winner, and crowdfunding offers the best of both worlds. They can enjoy the thrill of helping to get new ideas off the ground, and also the reassurance of backing a venture with a proven proposition, that has already gained traction through generating sales, contract wins, or partnership agreements. There are risks to investing in businesses at every stage of growth, of course, so it’s important investors still do their own careful research into the companies they’re considering supporting. So now we stand at a crucial tipping point. Crowdfunding has disrupted the investment sector, empowering both businesses and investors over the past few years. But what next? Many industry commentators are saying that crowdfunding now needs to prove itself as a viable platform through exits that provide investors with the promised returns. Exits will happen – and I’m confident they’ll start happening soon. Those people who invested in companies three or four years ago will begin to receive healthy returns, as businesses successfully exit. Investors in Crowdcube Mini-Bonds are already seeing returns, with over £130,000 in interest having been paid out to investors in the Eden Project, Chilango and River Cottage. As a result, investment brokers who have been sceptical will start moving into the crowdfunding space, as clients demand the opportunity to invest. The sector will continue to grow and challenge traditional investment models, as well as our way of thinking about investment. That is an incredibly exciting prospect. Do you think equity crowdfunding has reached a stage of maturity, or does it still have some way to go? Let us know in the comments box below.
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