Searching for that initial capital investment for your start-up or funds for virtually any kind of creative venture has just got that much easier with the extraordinary rise of “crowdfunding”.
The concept is simple. Why rely on a few big investors with big demands, when you could aggregate online the smaller contributions of many? Individuals pitch projects, and in return for their money sponsors receive something in the way of a small reward; perhaps a mention in a film’s credits, or, as one Oxford-based project advertised, “a scrumptious three-course formal dinner in the stunning Brasenose College dining hall.” Rewards increase with the level of sponsorship, and the model has been extremely successful, with millions of pounds pouring in through donations often as small as £5.
The rules are that the projects must be clearly defined, with a specific time limit and minimum sum being asked for. Investors do not have to part with their money unless this amount has been fully pledged, and only then will the crowdfunding site take a cut.
Ayan Mitra, CEO and founder of crowdfunding platform CrowdBnk, believes that the potential for crowdfunding in the UK is huge. He calculates that there are around 25,000 viable small businesses every year that fail to find growth funding, not to mention something in the region of 100,000 start-ups which need to get off of the ground in the first place. The Breedon report, which looked at access to finance for businesses, estimates that this funding gap could be up to £191 billion in the next five years. Mitra says, “Not all of this can be fulfilled with crowdfunding of course, as not all funding requirements fit the crowdfunding model. But if crowdfunding could service even one per cent of this gap, that will bring an additional capital pool of one to two billion GBP over the next five years.”
The crowdfunding model has been primarily used for creative work rather than for business ideas, with crowdfunding sites acting as matchmakers between supporters and projects ranging from theatre productions, short films, dance and art shows. Yet this doesn’t mean it can’t work for entrepreneurs. CrowdBnk is one of several new crowdfunding platforms to have been given authorisation by the FSA last year. Mitra argues that having the capability of handling regulatory and governmental requirements means that he can offer entrepreneurs the opportunity to pitch to investors without needing regulatory change. The FSA warns though that most sites are not authorised, and there is a significant risk of losing money with no protection should the business or project fail.
But for the users at least, the experience is easy. Gina Robinson, ex-President of the Oxford Belles, used the crowdfunding platform Sponsorcraft, which specialises in student and society crowdfunding, to finance a CD for the Belles and to help cover the costs of performing at the Edinburgh Fringe. She picked crowdfunding because she wanted people to get something back, offering free CDs and free performances as rewards: “After all, we’re not a charity case! Also as there are a lot of other a cappella groups in Oxford, people may think it unfair to donate to one group and not the others – this is why we didn’t apply to our colleges for bursaries for the trip, as we assumed they’d feel the same way.”
Another student, third year engineer Ollie Bent, raised £1620 through Sponsorcraft towards a project with Engineering World Health in Tanzania. He too praised the crowdfunding experience for providing “an immediately accessible way of making my fundraising efforts public.” He felt however that the amount of general public support he received was little, with most funds gathered from personal contacts. Robinson also admitted that very little money was from the general public. Some was from people who had seen the Belles perform, but mostly it was from family, friends, and old members, to whom the Belles advertised through social media.
Still, for sponsors and project owners alike, crowdfunding has been an effective means of fundraising in a manner more like a business relationship than a plea for donations. As Mitra says, “Everyone deserves to play the game. It’s no longer the realm of the gatekeepers. For investors it’s about engagement and being part of a story. For entrepreneurs crowdfunding represents an opportunity to validate your ideas, respond to feedback, find your potential customers, all in addition to getting funding.” By embracing big ideas, and giving everyone a chance, crowdfunding certainly looks set to continue its growth trend in the UK.
