Crowdfunding – coming to a place near you!

Over the last few decades it has been recognised that financing a new business is possibly the most difficult obstacle to any entrepreneur. The banks do not want to know, venture capital very seldom will support startups and business angels are tedious to track down and are often difficult to work with. The politicians bend themselves in all directions to show their support for funding whilst not actually spending anything, unless it is on more civil servants, lawyers, accountants and regulations.

The one area that has increased in size dramatically over the last few years, especially in the US, is crowdfunding. Even Vince Cable is engaging with the sector to try to find ways of encouraging it. That is until we run into the brilliance of the FSA. Remember them? They are going to be broken up they say, but unfortunately I get the impression that it is actually breeding in the meantime. Trying to figure out what the successor is, bearing in mind that there was a sign of hope that it would all be wrapped up in the Bank of England. I find we will have a PBU ‘developing and piloting’ the PBA, the FCA, the CBU and possibly lots more acronyms. How it all links together and how you can ever find your way through requires ………. you guessed it: expensive lawyers and civil servants. Lots of them!

In other words, it will be made even more difficult for everyone to raise much needed capital, so the demand for a more simple alternative is even more important. The alternative is without a doubt crowdfunding, especially equity based crowdfunding. This is the one area where we are still ahead of the US, but they are working hard at catching up, and they will in 2013. That is of course unless the FSA sticks its oar in, in which case we may fall behind sooner.

The FSA has presented us with a brilliant analysis of the crowdfunding product and come to an absolutely spectacular conclusion: “investors could lose all of their money”. They advise only ‘sophisticated investors’ look at this market and leave the rest of us to invest in shares of say RBS, Facebook or Groupon or better still, put it into any pension or savings account. The public involvement in any of these has been highly regulated for a long time.

Had Facebook and Groupon allowed crowdfunding, those who invested in the startup, would have made a lot of money, even after the shares crashed. However, this was reserved for the ‘sophisticated investors’ so we were not allowed to touch them, so we could only invest once it got into the regulated space. If you have done so you have now lost a lot of money – in fact these two companies have lost the general investors more that the whole crowdfunding sector is likely to raise in the next few years.

Crowdfunding has some big advantages over all other forms of investment. It allows for small sums to be invested, sums us ‘unsophisticated investors’ can afford to lose.  Unlike the much bigger sums required to fund a ever declining pension or the amount put away in a savings account, the investor can put in anything from £10 upwards. By putting little amounts in a range of businesses, the risk is easily spread.

Another big advantage is that the overheads in crowdfunding are very low, allowing more of the investment to be put towards financing the business. The overheads of funds and banks are very high, in part due to the very high salaries paid, but also because of the staff needed to cover the ever increasing regulatory process.

Last but not least the crowd who will be investing in the business forms part of the market for the product. It the market does not like the product, the crowd will not fund it. In other words, there is an inherent protection in the process as well as an inherent marketing effort for the new business.

Of course many businesses which will get crowdfunding will fail, but equally, many will be very successful. So the FSA, in its dying days, would do well to encourage the great crowdfunding initiatives, and to stop trying to find ways of discouraging it. Just because you may stub your toe does not mean you should stop walking!

Enterprise Britain has a strong interest in crowdfunding and we would like to hear from anybody who wants to know more. Please email me at Enterprise Britain if you are interested in this new way of funding enterprising businesses.

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