Power to the people: How crowdfunding is changing the shape of business investment

We explore the merits of a relatively new funding phenomenon that is taking the business world by storm

Lewis Arnold Anastasia of Indiegogo on stage at Campus North
Anastasia of Indiegogo on stage at Campus North

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.

PA A cat looks on, right, as a visitor strokes a cat in the newly opened Lady Dinah's Cat Emporium in London
A cat looks on, right, as a visitor strokes a cat in the newly opened Lady Dinah's Cat Emporium in London
 

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.”

Lewis Arnold Anastasia of Indiegogo at Campus North
Anastasia of Indiegogo at Campus North
 

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.

Lewis Arnold Crowd at the crowdfunding seminar at Campus North
Crowd at the crowdfunding seminar at Campus North
 

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.

Lewis Arnold Anastacia chats to would-be-entrepreneurs
Anastacia chats to would-be-entrepreneurs
 

“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.

The four Ps which can help start-up ideas

According to Indiegogo, it’s to do with ‘the four Ps’.

“The first is people – that is your crowd,” Anastasia said.

“The first 30% of funds will come from your own people, whether they’re friends, family, or colleagues.

“The second P is passion; people might want to get involved because they’ve a passion for film-making or tech or whatever.

“The third P is participation. People want to be part of something bigger than themselves. Maybe they’re an accountant, but wanted to be a rock star. Or perhaps they want to do charity work but can’t manage it because of work. Crowfunding makes them feel part of something.”

The fourth P stands for perks.

Offer incentives to investors and you’ll up your return by 143% – especially if they’ve a touch of quirkiness about them.

In Australia, for example, producers of a zombie movie offered zombie roles in exchange for 200 dollars. For 1,000 dollars, the undead investors got the questionable pleasure of being slayed on camera.

“We tried to make the perks as personal as possible,” Maggie said of QuantuMDx’s campaign.

“As well as T-shirts, mugs and lab coats branded with a unique and beautiful hand-drawn mosquito illustration, we also offered a photograph of the first child tested using our Q-POC device as part of the clinical trial so that contributors could see the impact their contributions will have.”

Currently, there are at least 80 crowdfunding platforms in the UK alone, with the North East getting its share of the scene through the likes of GrowthFunders, the region’s first online equity crowdfunding platform.

Norman Peterson, who co-founded the business with his brother Craig, said: “The aim of GrowthFunders is to streamline the fundraising and investing process.

“Entrepreneurs can get their businesses in front of potential investors who in turn are excited to play their part in supporting a new wave of Great British businesses.

“Depending on personal and company circumstances, investors can receive up to 78% tax relief on SEIS-compliant deals. Investing in this way was previously available only to wealthy individuals – think Dragons’ Den - but GrowthFunders’ unique structure means that suitably-qualified individuals can become online angels and invest from as little as £100.”

The first business GrowthFunders supported was the Stockton-based Lewis Pennicott Design Ltd, which raised £10,000 in its Proof of Concept funding round for the prototype of its kitchen product, Chop2Bowl.

Growthfunders has also helped the likes of the County Durham-based Soccer Factory leisure facilities and Vega V, a business providing a sports training system.

Craig Peterson added: “The interest up to this point has been fantastic. We’re working with some very talented entrepreneurs and are excited about the next 50 deals we have in the pipeline that will be listing on the platform over the course of 2014. We are also looking forward to welcoming investors to the site.”

It shouldn’t be a problem.

According to market commentator Justin Urqhart Stewart, of Seven Investment Management, there are a growing number of investors with a real desire to contribute to local businesses.

Stewart even believes a form of crowdfunding could play a crucial role in an overarching financing body that could go some way to making up for the absence of a local stock exchange.

“Since the closure of the Newcastle Stock Exchange there has been a huge gap in the market for smaller and regional companies to be able to access the equity investment market,” he said.

“The London Stock Exchange doesn’t help, and even the AIM market isn’t really that user friendly for smaller companies and start ups.”

Local exchanges, he suggested, could therefore give private investors here the opportunities they wanted.

“We know that there is an interest and demand for some investors to be able to commit a modest proportion of their portfolios locally,” he added.

“If there were 1000 investors with £10,000 in and maybe an ISA or pension, it could give the North East £10m, which otherwise would have been invested elsewhere in the UK and the world. Private equity and venture capital plays a part but is often too short term.

“We shouldn’t overplay it, but it has the potential to provide an alternative to bank finance.”

As to those GoCrowdfundBritain participants at Campus North, was there any hope for the Newcastle start-ups?

“There was potential there,” said Anastasia. What I’ve seen across the cities we’ve visited is that’s there are lots of amazing ideas out there; people just need to know how to get them off the ground.

“That’s why crowdfunding can present some incredible opportunities.”

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