ISSUES
: Business and Trade
Chapter 1: Business today
15
Crowded out: how crowdsourcing for
start-ups turned into business as usual
An article from
The Conversation
.
By Ross Brown, Lecturer in Entrepreneurship
and Small Business, University of St Andrews and
Suzanne Mawson, Lecturer in Entrepreneurship,
University of Stirling
C
rowdfunding has been
hailed by some as the
“democratisation of finance”.
To many, it is viewed as a key
alternative source of finance where
we can all get involved in backing
new companies through either
donations or the purchase of
equity. Unfortunately, it hasn’t quite
worked out like that.
There are several new financing
models that use the umbrella term
of crowdfunding, but they can be
fundamentally different. In theory,
‘equity’ crowdfunding lets large
numbers of small investors invest
in firms via online platforms – or
‘mini stock markets’ for start-ups –
regardless of their location. From a
business perspective, firms should
be able to draw upon a wide range
of funders in the crowd, who they
might never have known existed,
to fund, develop and grow their
businesses.
What we’ve found is that equity
crowdfunding isn’t as ‘new’ or
‘inclusive’ as people first envisaged.
Crowdfunding laboratory
The UK was one of the
first
countries
to
grant regulatory
approval to equity crowdfunding
and, through various tax incentives,
has become something of a
unique ‘laboratory’ for this form of
entrepreneurial finance. We have
witnessed a massive growth in
equity crowdfunding. It appears
to be doubling in size every year,
spawning well-known platforms
like Crowdcube, Seedrs and The
Syndicate Room. In the space of
three years Crowdcube alone has
raised over £100 million in capital
for over 300 start-ups.
During 2015, we undertook the
largest in-depth study to date,
examining equity crowdfunding in
the UK, interviewing over 60 British
start-ups to get their views of why
firms use equity crowdfunding, how
the process works and the benefits
it brings to firms.
Some of our findings confirmed what
is already known – that it is f i l l i ng
the funding gap for
young
start-
ups who
no longer consider banks as a
source of early-stage growth
capital. Indeed, many start-ups are
attracted to the speed with which
they can raise funding and like the
lack of strings attached. There are
also important intangible benefits
to firms from the process, such as
firm valuation, product validation
and media exposure.
Professional game
However, some other findings were
unexpected. Contrary to the idea
that crowdfunding is a transaction
between firms and the ‘crowd’,
seamlessly
brought
together
through the Internet, we found
that deals were often driven by
pre-existing networks of investors.
Roughly around two-thirds of
the
crowdfunding
campaigns
in our study were ‘pre-seeded’
and backed by business angels
(professional investors), with the
crowd playing a ‘supporting role’
where small investors are issued
B-class shares that have no voting
rights attached.
These professional investors are
investing heavily in businesses
that they know of and
which are often
