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Crowdfunding - A brief overview

Posted on Feb 11, 2014 by Sandy Finlayson  | Tags: crowdfunding, funding, finance, banking, lending, startups, SMEs, alternative finance market,  | 0 Comments

Background

Emerging in response to a tight lending market and global capital shortfalls, and facilitated by the internet, crowdfunding has grown exponentially in the last five years. This Briefing Note gives some detail as to how big it is, how fast it is growing, how it is organised, and the response of the UK’s financial and regulatory bodies.

Scale and scope

  • Almost £1bn globally raised by alternative finance in 2013 as at 19 December 2013 (source: FCA).
  • The UK alternative finance market provided £463m worth of early-stage, growth and working capital to over 5,000 start-ups and SMEs in the UK between 2011-2013. £332 of this was in 2013 alone (source: Cambridge University).
  • Equity-based crowdfunding grew by 618% from 2012-2013 (source: Nesta).
  • Peer-to-business lending grew by 211% from 2012-2013 (source: FCA).
  • In 2014 the UK alternative finance market will likely grow to £1.6 billion and provide £840m worth of business finance for start-ups and SMEs (source: Cambridge University).

 

 

(Source: NESTA)

 

 

(Source: NESTA)

 

 

(Source: NESTA)

Crowdfunding – how does it work?

Type of crowdfunding

Key aspects

Sums raised

(2013)

FCA Regulation from April 2014?

Donation–based

crowdfunding/Peer–to–

peer online fundraising

No legally binding financial obligation incurred by recipient to donor; no financial or material returns are expected by the donor. Example: Bloom VC.

£310m

 

Peer–to–peer lending

Debt–based transactions between individuals; most are unsecured personal loans.

£287m

 

Peer–to–business lending

Debt–based transactions between individuals and existing businesses who are mostly SMEs.

£193m

 

Invoice trading

Firms sell their invoices or receivables to a pool of individual or institutional investors; often involves an auction and buyback.

   

Equity–based

crowdfunding

Sale of registered security by mostly early–stage firms to investors. Example: Crowdcube, ShareIn.

   

Reward–based

crowdfunding

Donors have an expectation that recipients will provide a tangible (but non–financial) reward or product in exchange for their contribution.

£20.5m

 

Debt–based securities

Lenders receive a non–collateralised debt obligation typically paid back over an extended period of time. Similar in structure to purchasing a bond, but with different rights and obligations.

£2.7m

 

Revenue/Profit sharing

crowdfunding

Issuers incur an obligation to repay lenders, but these payments are variable and a function of the revenues or profits of the firm.

£1.5m

 

Microfinance/Community

Shares

Microfinance refers to the lending of small sums to entrepreneurs who are often economically disadvantaged and financially marginalised. There is a debt obligation incurred, but the amounts lent are very small. Community shares refer to the sale of shares in social enterprises serving a community purpose in a particular locality.

£0.8m

 

Business models

Within crowdfunding itself – and separately from proposed FCA regulations – there are a variety of business models.

1. Money for business ventures

As the market is expanding so quickly the following tables are illustrative rather than comprehensive and anyone contemplating this type of finance should conduct a detailed Internet search.

UK

Name

Funding
model

Focus

Country

Notes

Angels Den

Equity, Donations, Loans

All businesses

 

FCA Regulation coming in April 2014

BankToTheFuture

Equity, debt, rewards

small businesses and new start-ups

 

FCA Regulation coming in April 2014

CrowdCube

Equity and rewards

start-ups, small businesses, growing businesses

 

FCA Authorised.  Has formed a ‘crowdfunding fund’ managed by Braveheart Investment Group.

Funding Circle

 

Small businesses

 

FCA Regulation coming in April 2014

LendInvest

Debt/loan

Property Development Entrepreneurs/ Mortgages

 

First live peer-to-peer lending platform specifically for residential and commercial mortgages

rebuildingsociety.com

 

All businesses

   

Relendex

 

Property

 

Lending exchange for commercial property.

Seedrs

Equity

Seed-stage businesses, Investments from £10+

UK & Europe

First equity crowd funding platform to be approved by the FCA.

Seedups

Equity

Early stage tech-start-ups

UK, Ireland, USA & Canada

 

Share-In

Equity

Early stage companies – tech and health

 

FCA approved.  Holoxica just reached its target.  It’s an Edinburgh University spin-out.

Square-Knot

Equity and debt

All companies, including those “squeezed” by banks.

   

ThinCats

 

Small businesses

 

FCA Regulation coming in April 2014

Unbound

perks

Books

 

Acts as both a crowdfunding platform and a publisher. Launched Terry Jones' Evil Machines, the firstbook to be financed by crowd funding.

       

By some margin the largest non-donation/reward crowdfunding platform of any sort in the UK; FCA Regulation coming in April 2014

Rest of World

Name

Funding
model

Focus

Country

Notes

AngelList

Equity, debt

Start-ups

 

Currently serves accredited investors

Bolstr

Revenue share

Small businesses

 

Able to operate now, pre-JOBS Act (US equivalent to FCA regulation over here)

CircleUp

Equity

Consumer products and retail

 

Currently serves accredited investors

Companisto

Equity

 

Germany

 

EarlyShares

Equity

     

Fundable

Equity

Seed stage businesses

   

FundedByMe

Equity and rewards

Entrepreneurs

Sweden, Finland, Norway, Italy, Germany, Denmark

 

Gambitious

Equity

Game development

Netherlands

 

Innovestment GmbH

Equity auctions

 

Germany

 

Invesdor

Equity

Start-ups and growth companies

Finland, Sweden, Denmark and Estonia

 

InvestedIn

Equity

     

Kopernik

Other

3rd world issues

   

Lending Club

Equity/loan

     

MicroVentures

Equity

Tech Start-ups & High Growth

 

Currently open to Accredited Investors

Prosper Marketplace

       

Rock The Post

Equity

Early stage tech-start-ups

   

SecondMarket

Equity, debt

Late stage start-ups and privately held companies at a pre-IPO or pre-acquisition stage

   

StartupValley

Equity

Technology start-ups and businesses

   
 
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