Access to Finance: Crowdfunding on the rise
CROWDFUNDING is growing in popularity but a Yorkshire entrepreneur is sceptical of its model.
Crowdfunding involves a number of people each investing, lending or contributing smaller amounts of money to a business, which is then pooled to reach a funding target.
A number of businesses have used the model successfully – Upstart Scottish brewer and beer brand Brewdog has used crowdfunding to not only raise finance, but as part of its sales and marketing efforts and to engender brand loyalty among its customers.
Entrepreneur and investor Gerard Toplass is something of a crowdfunding cynic.
The businessman who runs Hull-based office stationery and furniture manufacturer Claughton office equipment, has invested in software company Sypro, manufacturer and service provider Leisure electronics and Pagabo, a consumer focused education revision system for children doing GCSEs.
“Is the crowd funding equity model just a bit voguey at the moment?” he said. “It’s high tech, media, trendy but in reality, the valuation of the business is so skewed, I think if you’re a proper investor, you’d never put your money in at those sorts of rates. I think it will work itself out and turn into proper angel type networks but the peer to peer will be more about debt than equity.”
However, Leeds University graduate Daniel Rajkumar launched Leeds-based rebuildingsociety.com in 2012 to enable small businesses to access the finance they need and give savers better returns. The business enables individuals to lend varying amounts of money – starting from just £10 – to established UK businesses. To date, rebuildingsociety has advanced £2.6m of cash generated through private individuals to over 50 UK businesses.
Rajkumar says: “Many of the crowdfunding platforms are conducive to having hundreds and thousands of different shareholders who participate in the crowdfunding exercise. That’s good – you get positive PR, feedback, and it is reasonably quick.”
Rajkumar says that within the crowdfunding space, there will be individuals who will ask to take a higher stake, so what can result is these people asking to participate in an advisory capacity on the board of the company.
“You might have key partners more actively involved because their skills are more suited to it and three or four passive investors that are essentially just de-risking the investment,” he adds.
“As people get familiar with equity crowdfunding it will start educating the wider public about making angel investments. It is risky and people will get it wrong, but then platforms will PR the successes, so it does help educate the broader population about the risk they are taking in terms of business, which is a good thing.”
Looking ahead, Rajkumar says that the next generation of crowdfunding platforms, which are not for start-ups, will appeal to businesses that have been established for some time.
Chris Schofield, managing partner at West Yorkshire law firm Schofield Sweeney says: “We’ve seen quite a lot of interest though, and the interest we’ve seen has been with breweries.
“The crowdfunding model seems to work well with breweries and it works well when equity has attributed to a retail benefit. Brewdog (the craft beer company) did it well.”
