Member Article

Crowd-funding is it for me?

Jonathan Gold, director at Rivers Capital Partners, looks at crowd-funding, and how to determine if it is right for your business.

First, what is “crowd-funding”? Well, there are a number of variations but in its simplest form it’s a way of raising cash from the general public to fund a project or business. This is not a stock market listing of course, but rather a transaction through one of a number of web-based platforms that allows the public to invest.

The usual protections and assurances that investors get in listed stock market companies that have had to conform to certain standards are just not there for crowd-funding investors. I’ll return to this point at the end but mention it here first. You may lose all your money; investing in small businesses or start-ups is very risky.

That said, in 2011 around 1.5 billion dollars was raised on crowd-based platforms around the world. One of the larger established players in equity crowd-finance is “Kickstarter”, based in the USA. In 2012 it raised $274m from its web platform to help its investors take equity stakes in new businesses. As of the day I am writing this the UK platform “Crowdcube” has raised £6.71m from a total of over 33,000 investors. The idea is to give the public the same access to the potential high gains that professional investors and venture managers sometimes achieve. Just don’t forget that with potential high gain also comes high risk.

The idea grew from the concept of accessing the know-how or expertise of the “Crowd”, that great democratic, (by and large) free resource available to all of us via our computers and mobile devices, the web.

It is evolving and does have the potential to challenge venture capital and more conventional sources of finance for businesses. As with most things on the web you need to take some care, not least by reading the small-print, setting out the terms and conditions of the crowd-finance sites, before posting your plans and starting to raise the cash.

Perhaps an obvious point is most crowd-source cash isn’t free. You are expected to give something back. That might not be obvious, as the primary route of crowd-source finance was through charitable giving and philanthropy, both of which still thrive through a number of platforms.

Assuming you are not running a charity, you need to consider what you will give back. More importantly it comes back to considering what you want the cash for in the first place. This will guide your choice of not only which crowd-finance platform but also what type of cash you want. Namely what type of finance do you need and can you meet the return expectations, simply put, do you want:

Equity finance: Have you got a real growth business that needs cash now but can’t service a loan and is capable of building value for shareholders? Do you then want to sell this business in due course to return the investment and make a high return for the investors?

Loan capital: Do you just want to pay a level of relatively low interest from day one and return the capital at some point without selling the business?

Also, are you looking at funding a project or a business? The former will probably mean you want either a loan or perhaps you want to just offer some discount, membership or other non-cash benefit to “investors”? Here are some places that illustrate the diversity of the crowd-finance landscape, although this is hardly a complete listing:

We Fund is a small project finance site with a few people raising cash in the hundreds of pounds bracket, see www.wefund.com

Crowdcube (mentioned above) is an equity based site with people raising cash into the hundreds of thousands. See: www.crowdcube.com

Funding Circle has raised £95m and is mainly a loan fund giving its investors a 6.2% average interest providing businesses with a few tens of thousands to hundreds of thousands of pounds in investment, find them at www.fundingcircle.com

Lastly, a few things to think about if you are going this route. If you are a potential investor, take care. These are risky investments and you can lose all your money. So read the small print, and take advice before committing any cash.

Small companies have a nasty habit of going bust. Venture capital funds and other collective investment schemes know this and expect up to 40 to 50% or more of such investments to fail. They cover these losses by making multiple investments across a range of companies and wait for small numbers of massively successful businesses. Bear in mind these people are also experience professional investors, repeating their success and methods is not easy

If you are a business raising capital bear in mind you may find yourself with a large number of lenders or investors. Currently the average single investor may only be putting in around £100 to £200 in a £100,000 fund raise. Do you have a strategy to manage your investors? Also, few of these platforms provide the technical support or know-how to assist you other than with the cash. Equity, venture capital and business angels can provide a lot more than just the money with hands on mentoring and advice, including selling your business in the future.

I’m not against crowd-finance or crowd-funding, just go in with your eyes open. Decide what you need first, with some care, and take advice. You should know what your business needs are and what additional help you might want. Be an informed buyer of cash and be prepared to manage your investors, whoever they are. It’s not necessarily the easy option but it is a growing and important one that is starting to become a mainstream source of cash.

This was posted in Bdaily's Members' News section by Rivers Capital Partners .