A north-south divide over the use crowdfunding is putting the future of young Scottish businesses at risk.
The University of St Andrews and University of Stirling found that the UK has “quickly established itself as the fastest growing equity crowdfunding market in the world” with companies raising £146m in 2015, up from £91m in 2014.
However, in terms of the demand, the universities said there was a “clear north-south divide” in the UK.
The research discovered that by far the strongest demand for equity crowdfunding is from firms located in London and the South East of England. In contrast, Scotland attracts just four per cent of the UK total for equity crowdfunding, around half the level expected.
This is despite the high profile of Aberdeen-based craft beer firm Brewdog, which has raised £7m in three rounds of crowdfunding. The report warned that Scottish firms seem largely “left behind by the crowd”.
Ross Brown, from the Centre for Responsible Banking & Finance at the University of St Andrews, said: “While startups in London and the South East of England have eagerly embraced equity crowdfunding, the uptake from Scottish firms seems sluggish. In theory, Scottish firms should be able to access crowdfunding just as easily as firms in London. It’s hard to say the precise reasons for this lack of demand but it may represent a lack of knowledge of this funding source in Scottish SMEs.”
Co-author Suzanne Mawson, from the University of Stirling, added: “A lack of interest in this emerging form of finance suggests that Scottish firms may be missing out on important opportunities to help grow their new ventures.
“There may be scope for policy makers in Scotland, such as Scottish Enterprise, to consider signposting firms towards this important source of growth finance.”
Overall the report said its findings suggested banks, venture capitalists and business angels were increasingly being “crowded out” by equity crowdfunding platforms, as businesses looked to grow.
The study interviewed 42 British firms which had received crowdfunding and found that each are primarily attracted to the speed with which funding can be raised – often a matter of weeks – and the lack of “strings attached”.
The types of firms seeking this “fast money” were very young, small and often pre-revenue, with the majority operating in consumer-oriented sectors such as digital media, food and drink, fintech and transport.
The firms examined raised on average £408,000 issuing, a mean 19 per cent equity for the investment to 164 new shareholders.
The research discovered a number of other important benefits from crowdfunding. Entrepreneurs sought “validation” of their company concept and business model by the crowd. They also benefited enormously from the media exposure they received from the process via their campaigns and engagement with potential investors.
Brown said: “For the most part, startups no longer see banks as an appropriate source of funding and are increasingly viewed as archaic given the dynamic nature of the modern day start-up economy. By contrast equity crowdfunding is viewed as ‘fast money’ which helps new ventures to grow rapidly.
“The average size of funding raised surprised us and suggests that crowdfunding is not just a source of startup funding but also growth finance to enable startups to upscale. While some organisations have labelled crowdfunding ‘alternative’ finance, our work suggests that ‘disruptive’ finance would be a more appropriate term.”
Mawson added: “By connecting startups to new investors, new customers, new markets and new media channels, equity crowdfunding is now a vital mechanism for accelerating the growth of innovative new companies.”
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