Walker Morris partner talks crowdfunding from a different angle

CROWDFUNDING is shaking up the business funding process, broadening options for businesses, and getting the public more and more involved in what previously was the province of banks, private equity houses and experienced investors.

Regulatory lawyer and partner at law firm Walker Morris Andrew Northage spoke to TheBusinessDesk.com about the advent of crowdfunding, and how people are rushing to keep up with its evolution.

Crowdfunding is a term that covers a multitude of different business models, from loan-based funding, a shareholder model or aiming crowdfunding at ordinary investors, in theory members of the public who invest smaller amounts.

“These relatively modest amounts mean that people have more control over their investments than hoping for the best in a mutual fund,” said Mr Northage.

This type of crowdfunding appeals emotionally, which is where branding and storytelling become important in the funding process, perhaps even more so than they would in a straightforward funding deal from a bank or investor.

“Some fundraising plays on people’s emotions,” said Mr Northage. “When people are interested in the product, particularly in the food and leisure sectors, people might invest because of that interest rather than immediate financial gain.

“With Kickstarter for example, it is not equity-based, you’re backing someone because you like what they’re doing and you get a reward from it.

“You have bought into the concept and in truth, you might not get the same value back, it’s about supporting them and hoping they grow.”

This may be the most well-known form of crowdfunding, but with other types for more advanced investors, you can get shares or have a contract where your money goes to them in the form of a loan which would be repaid if they are successful.

“Whilst you might have that link of liking coffee or headphones,” said Mr Northage, “with these types of deals you may not have a connection with the product or service, but you can see a genuine business project in their proposals.”

The benefit of loan-based crowdfunding is that by doing that investors of all experience levels can make a much more handsome return than if they were just putting it in a savings account.

“On the other side, you’ve got the equity funding. with a different regulatory model. I will get calls from people interested in crowdfunding, but this can mean half a dozen different things, each with different permissions and regulations from the Financial Conduct Authority. Crowdfunding is generic term, but there are many intricacies around it.”

These are complex issues and the authorities are having to react, instead of being able to plan for the future. As Mr Northage said:”There haven’t been any big failures yet which is why it is becoming popular.

“The FCA have been reactive it’s fair to say. They have to follow the market and make sure it operates properly rather than second guess what the market is going to do.

“There were people out there saying the FCA was way behind the curve, they don’t understand it or want to engage with crowdfunding, but that’s changed since crowdfunding entered the mainstream.

“Now the FCA has changed its guidance to bring crowdfunding within the framework that’s already there, and there may well be a review next year of market and framework as the market matures.

As Mr Northage explained, a risk as an investor is that you are not covered by a compensation scheme in the event of failure. But, it seems, there are been

“One of the attractions that crowdfunding has, particularly on loans side, is that it’s being done on a smaller side.

“It’s about the nature of tech that gets used, the benefits that that brings. It has enabled lenders, consumers and investors to get a higher rate of return when interest rates have been low, while at same time providing funding for companies, usually smaller ones and sometimes startups that wouldn’t necessarily get that funding elsewhere.

“As and when there is a big failure, it will shake the market, but people won’t necessarily rein in, the idea of crowdfunding is that if there is a big failure, individuals have not invested a huge amount of money.

“Smaller investments mean that if one of them goes, you’re insulated, you haven’t put all your money in one investment.

But things are evolving, lartger firms are getting in on the action and capitalising on their popularity. Brewdog, who have now launched their bar concept Shuffledog in Leeds, have been “pioneers in a number of ways in the way they see the world and run the business, down to how they write to advertising standards authority,” according to Mr Northage.

“It’s a very vibrant sector, interesting in terms of where it might go. In recent months, some corporate finance houses have started to link up with crowdfunders and offer it through more traditional routes, and some larger firms have taken up the idea as well.”