ISSUES
: Business and Trade
Chapter 1: Business today
16
located nearby to them; the crowd
then ‘herd’ towards firms who
obtain pre-seed funding. So in
many cases, equity crowdfunding
isn’t really a new or ‘alternative’
source of funding, but rather a
repackaging of more traditional
start-up funding.
As an Internet-mediated form of
funding, in theory, firms should be
able to access equity crowdfunding
irrespective of their geographical
location. In reality, however, there
seems to be a large ‘north-south’
divide in terms of successful deals,
with around half of all the deal flow
emanating from London and the
South East.
There are a number of potential
reasons for this. For example, the
majority of platforms are located
in London and we have found that
word-of-mouth referrals through
business networks are still very
important in both identifying and
accessing crowdfunding platforms.
Many businesses also want to
speak to platforms ‘in person’
before committing to a campaign
(rather than engaging virtually), and
so being within visiting distance of
a platform is important. So despite
the Internet-mediated nature of
crowdfunding, where distance
should be irrelevant, it is strongly
concentrated in the London and
the South East ecosystem. We
are currently exploring this trend
further.
Tip of the iceberg
Few non-professional investors
have the knowledge to undertake
their own due diligence on firms
before they invest nor do they
offer firms any additional value
(for example through advice or
support) on top of their financial
contribution. Indeed, some start-
ups have referred to the crowd
as “dumb money”.
Observers
have
also
questioned
the highly inflated
valuations of some
of the firms funded
through
equity
crowdfunding, many
of which are Internet-
based firms linked
to the so-called
‘sharing economy’,
and operating in
consumer-oriented
markets with no
intellectual property
or
recoverable
assets.
Given the high failure
rate of new start-
ups generally, and
the nature of most crowdfunded
businesses, few non-professional
investors are likely to see a return
on their investment any time soon.
Despite these reservations, given
the current growth trajectory of
equity crowdfunding, what we’ve
seen so far may just be the tip of the
iceberg. However, icebergs can sink
ships. While providing an important
source of start-up funding, equity
crowdfunding raises a number of
thorny issues in terms of investor
returns,
investor
protection,
sustainability and the need for
proper regulatory safeguards.
Crowdfunding has been heavily
promoted by organisations such
as Nesta, but the way it actually
works is strangely familiar. We
thus advocate a more critically
informed discussion about equity
crowdfunding, especially given
the UK’s heavily deregulated and
proactive fiscal policy environment
for this emerging source of
entrepreneurial finance.
16 December 2015
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The above information is
reprinted with kind permission
from
The Conversation
. Please
visit
for further information.
© 2010–2016, The
Conversation Trust (UK)
Reward-based crowdfunding market volume
by year and by quarter (2013 to 2015)
2013
£21m
£26m
£8.21m
£12.21m
£13.12m
£8.42m
2014
2015
£8.42m
All quarters
Q1
Q2
Q3
Q4
£41.96m
Growth rate
24%
61%
Source:
Pushing Boundaries, The 2015 UK Alternative Finance Industry Report
,
University of Cambridge Judge Business School & Nesta, February 2016
