Blog News

How crowdfunding is changing the shape of business investment

by International Commercial Investment on August 4, 2014

Source: The Journal

Imagine the sales pitch: a London cafe where city dwellers seeking relaxation could spend two hours in the company of cats, as well as caffeine, for £5 a go. Not exactly the traditional domain of the investor equipped with a keen eye for growth potential. But when Lauren Pears took her idea to the masses, they voted with their wallets and then some.

Using crowdfunding – an open online platform that gives everyone the chance to donate – the entrepreneur raised over £100,000 to get the business started. One particularly generous investor then contributed the same sum again, hopeful Lady Dinah’s Cat Emporium could set up a second establishment. Certainly, it’s an exceptional tale, but by no means is it unique; crowdfunding – perhaps once seen as more hip than helpful – is becoming one of most talked about subjects in business. “It’s a means of democratising finance and making it possible to raise money anywhere,” said Anastastia Emmanuel, marketing manager for the UK at Indiegogo, the company that started it all. “Previously, you just had the gatekeepers, like the banks and investors. “There were a small number of people making the decisions and that wasn’t fair.”

Indeed, it was this perceived unfairness that prompted Indiegogo’s chief development officer Danae Ringelmann to co-found the business six years ago. Having seen her parents locked out of traditional finance, it hit her, while working for a major bank, that perhaps the system needed re-thinking. On attempting to source investment for a well-received Arthur Miller play, then, the seeds of the solution were sown. “Her role was to bring in the investors to sign the cheques,” said Anastasia. “But although it was a huge success and the investors said it was brilliant, they told her it didn’t quite align with their objectives. “That was something of a defining moment; it was the audience and the people on stage who really wanted to make it, but they didn’t have the power.” Indiegogo is now huge – 200,000 campaigns from 224 countries and territories so far, with 70 countries or so represented on any given day.

And, lest it be thought only techy hipster types are getting in on the action, the range of projects is equally jawdropping – everything from charitable appeals to musicians who’ve ditched their record labels. The company, though, wants to spread the word further while shattering perceptions that it is just for the London cool kids. Hence, it’s running workshops around the country as part of the GoCrowdfundBritain campaign, which aims to finance over 1000 new initiatives by end of the year.

For the event at Newcastle’s Campus North, dozens of would-be entrepreneurs, proposing everything from robotics companies to self-published books, turned out to get the lowdown on the mysterious Holy Grail of funding. They also heard from QuantuMDx, a Newcastle biotech firm that’s been there and done that in terms of attracting investors. The firm turned to Indiegogo to help it further the development of a handheld device – the Q-POC – that can diagnose diseases like malaria in minutes. “Crowdfunding, for us, was not just about funds but about building a community that shares our vision,” said Maggie Love, business development and marketing executive at QuantuMDx. “We now have a network of supporters who believe in our Q-POC device, who tell their friends about it and who will continue to follow our progress to market.” It’s this kind of benefit, Anastasia says, that makes crowdfunding so special – the market validation, the increased visibility, the analytics that allow you to understand and connect with your customer base. “You’re creating evangelists who care about your product and want to shout about it from the rooftops,” she added.

Sure enough, as a result of the campaign, the Q-POC was featured everywhere from the Huffington Post and Fox News to The Scientist and Nature Nanotechnology. The company didn’t hit its target – getting $18,000 out of the $50,000 hoped for – but, using Indieogo’s Flexible option fundraisers can keep the money anyway. For those previously rejected by traditional investors, moderate success could mean a foot back in the door. And, as QuantuMDx proved, it can be enough to spark astonishing support – after the campaign, a further $8.4m came forward from private equity investors and Newcastle University. Indeed, crowdfunding isn’t meant to replace traditional finance, but rather to work in tandem with it, Anastasia said. And, oddly enough, the view is echoed among the old school itself.

Barrie Hensby, chief executive at NEL Fund Managers, which has been investing in North East firms for 25 years, said: “Our view is that crowdfunding can be complementary to the type of investment that we and other venture capital firms provide, and we’ve already been involved in deals where we’ve invested in a business alongside crowdfunders. “The wider the range of investment options available to North East firms, the better chance they have of getting the capital they need, and of getting the insight that goes with it into how it can best be used.”

Greg Bolton, head of corporate finance at RMT Accountants & Business Advisors, meanwhile, pointed out that, with crowdfunding, lots of support could equally mean lots of administrative work. There were also regulatory requirements, tax implications, potential fees. With sufficient research, though, many could benefit.”

Perhaps the more interesting question, then, is why the crowds should choose to fund in the first place.

International Commercial InvestmentHow crowdfunding is changing the shape of business investment