The UK’s crowdfunding pioneers have a lot to celebrate. According to a report published by innovation charity NESTA in collaboration with Cambridge University and the University of Berkeley, alternative finance intermediaries raised almost £1bn in 2012, an increase of 91% from the previous year’s figure of £492m. Beneath that broad umbrella, equity-crowdfunding platforms enjoyed growth of 618% in business volume while peer-to-peer lending site saw the value of deals rise by 211%.
In cash terms, the numbers remain relatively small. The report – entitled The Rise of Future Finance – estimates that peer-to-peer lending volumes totalled £287m, with the figures for invoice trading and equity crowdfunding coming in at £97m and £28m respectively. Meanwhile, donation sites raised £310m.
That’s fairly small beer when compared to, say, bank lending to small and medium sized companies, which, according to British Bankers Association figures amounted to more than £7bn in the third quarter of 2013 alone,
But crowdfunding in particular and the alternative finance market in general is filling an important niche in Britain’s funding ecosystem. The NESTA report estimates around 5,000 SMEs have accessed early stage, growth or working capital via alternative platforms since 2011. Often these are businesses that would have found it difficult or impossible to access traditional bank, angel or VC funding.
The market is rapidly evolving. Back in the early days of 2011, there were three prominent players outside the donations platforms, namely equity crowdfunder, Crowdcube, peer-to-peer lending site, Funding Circle and invoice trading specialist, Market Invoice. Since then new platforms have emerged, each with their own variation on the crowdfunding theme.
For instance, while Crowdcube provides a range of seed, early stage and growth capital, Seedrs focuses primarily on the seed funding. Then there are sector specialists, such as Abundance Generation (renewable energy projects)and Crowdmission (social, environmental and biotech investment). Meanwhile, Angels Den and Syndicate have created platforms combining elements of crowdfunding with professional angel investment.
Facing the future
What all this amounts to is a lively and diverse market, which also includes donations and rewards-based crowdfund platforms. But there are challenges ahead if the industry is to continue to expand.
According to some commentators, the biggest challenge is the impact of business failure coupled with regulation. Back in July 2011, fair trade beauty Products Company Bubble and Balm raised £75,000 on Crowdcube. Last year it ceased trading. The news fed into a debate about whether inexperienced and relatively unsophisticated investors should be putting their hard-earned cash into businesses and projects that carry a fairly high degree of risk.
Luke Lang, Marketing Director of Crowdcube acknowledges that all investors – ranging from those who put in £10 to the few who commit tens of thousands – should be aware of the risks and he believes the vast majority are.
“When Bubble and Balm ceased trading we didn’t get a single call from investors,” he says. “But we did get a call from the Financial Conduct Authority (FCA) and from the Mail on Sunday and the Financial Times.”
The FCA, Britain’s financial service regulator, has been consulting on a new raft of regulations for the equity crowdfunding and peer to peer market. In the case of equity crowdfunding, the rules are expected to stipulate that investment should only be promoted to those who understand the risks. Depending on how the regulations are finally implemented this may limit the market to wealthy investors and those who have taken financial advice. Meanwhile regulated peer-to-peer lending sites will be required to provide statements of creditworthiness to lenders and also make arrangements that if one platform collapses creditors will continue to receive repayments from debtor companies.
Luke Lang broadly speaking welcomes the introduction of regulation. “The fact that we are being regulated demonstrates that there is confidence crowdfunding has entered the mainstream,” he says.
However, he believes it is immensely important that Crowdfunding remains attractive to small investors. “Those who invest perhaps £20 or £50 have a value that goes beyond money,” he says. “They have a real sense of involvement with businesses and that translates into advocacy.”
Karen Darby, founder of Crowdmission agrees, saying that investment opportunities should be open to all, but she fears that a heavy-handed regime could exclude small investors from FCA-regulated sites. “2014 will be a defining year for Crowdfunding,” she says. “I hope the FCA will adopt a light touch approach. I believe that everyone should have unfettered access to investment opportunities.”
The new regulations would not affect donation-based crowdfunding sites or those that eschew FCA regulated status, perhaps by adopting a membership structure. However, those that sidestep the authority’s status would have to deal with the confidence/credibility issues that a non-regulated existence inevitably raises.
The new regulatory regime will inevitably have an impact on the crowdfunding market. The extent of that change will depend on fine details the regulator’s approach and the response of crowdfunding platforms.