Britain is in the midst of an astonishing entrepreneurial boom in which agile, innovative start-ups are swiftly becoming leading players in the market. For instance, in the arenas of financial technology, healthcare provision and social media, simple, meaningful ideas are being turned into valuable multi-national businesses — and this country is increasingly the hub of such activity.
However, just as interesting is the way that these businesses are being supported.
The funding void for start-ups and fledgling businesses that has been left by banks is being filled by the alternative finance sector – and, in particular, crowdfunding. The ability to fund a project by raising sometimes small amounts from a large number of people has made investing for individuals far more accessible, a digitally-fuelled trend that is only going to gather momentum.
But how safe is it?
Today, the UK alternative finance market is the largest in Europe, with a value of £1.78bn and growing rapidly. The value of the market rose by 168 per cent between 2013 and 2014. In 2013, the London-based innovation charity Nesta reported that the number of crowdfunding platforms operating in the UK rose by more than 50 per cent.
Currently, crowdfunding takes three distinct forms: reward-based crowdfunding, peer-to-peer lending and equity-based crowdfunding.
Reward-based crowdfunding uses the internet to appeal to potentially millions of people for small amounts of money. Those seeking finance will present their pitch on a crowdfunding site, including a promise of reward for investors. Peer-to-peer platforms allow investors to support fledgling companies or promising ideas and collect their money back, with interest, if their investment is successful. Something which has helped fuel the tech start-up boom in Israel, for instance.
Alternatively, equity-based crowdfunding platforms, such as my own company, VentureFounders, offer entrepreneurs and businesses an efficient way to raise capital from a pool of sophisticated investors in exchange for a share in their business.
Equity-based crowdfunding is a rapidly growing sector in the alternative finance market, with a growth of 600 per cent between 2012 and 2013, according to Nesta. The sector had a market value of £78 million in 2014, at an average growth rate of 420 per cent.
For entrepreneurs, the benefits of equity-based crowdfunding are manifold. Firstly, it allows them efficient access to funding: the process is transparent and straightforward and comparatively quick. In addition, by raising funds through equity crowdfunding, entrepreneurs are able to develop and interact with their support network of investors. These investors will potentially form the foundations of the company’s future success.
For investors, there are significant incentives for equity crowdfunding. Most important of these is the Seed Enterprise Investment Scheme (SEIS), a government incentive scheme launched in 2012 that stimulates entrepreneurship by offering tax breaks for investors.
Regulations are in place to ensure investors have the relevant experience or knowledge to understand the risks involved with investing in early-stage businesses and that financial promotions are presented clearly regarding the nature of the project’s assets and exit opportunities for investors.
It’s important, however, that all investors must understand fully the opportunities they are investing in and that platforms — like mine — make sure all of the due diligence carried out is made available to registered members. Unlike other platforms, VentureFounders has a minimum investment amount of £2,500 to ensure investors are serious about backing an opportunity; and it indicates a suitable level of risk appetite.
It’s also vital to pre-screen all of the investment opportunities on a crowdfunding platform and so provide a carefully curated set of investment opportunities and also to understand the risks. This way, the hard work has been done in making sure that the businesses seeking funding have financials that stack up, a product with proven demand, a strong and committed management team and a clear competitive advantage. It is important for anyone considering this type of investment to understand whether the platform they use knows their entrepreneurs and investment opportunities well — and also allows for and encourages a long-term relationship that helps to maximise returns.
Over the past five years, there has been a boom in the number of new businesses being founded in the UK — in 2014, the number exceeded 500,000. At the same time, there has been a proliferation of new companies offering alternative sources of finance for early-stage start-ups for whom traditional bank finance is not necessarily the right option, all helping to stimulate the UK economy.
We know that innovation is at the heart of these dynamic young entrepreneurs — and it’s also at the heart of those seeking to provide them with a robust financial platform to expedite their plans. With business models in a state of perpetual flux, opportunities abound. This time, however, it’s not just faceless corporations and banks most able to take advantage.
