Q&A with Bruce Davis: how crowdfunding works
In very basic terms - what is “crowd funding”?
Bruce Davis (BD): “Crowdfunding is a way of raising finance by asking a large number of people to each pay a small amount of money. Traditionally, financing the launch or growth of a business involved asking one source or a small number for large sums. However, crowdfunding enables businesses to attract tens, hundreds or thousands of funders, who each contribute relatively small amounts.”
When did crowdfunding emerge as a funding option for small businesses?
BD: “The first ‘peer-to-peer’ lender was Zopa.com, which launched in 2004 and that was followed by Funding Circle, which was the first to offer loans to small businesses. The first regulated debt-finance platform, Abundance Investment, which I founded, launched in 2011 and the first regulated equity platforms, Seedrs and Crowdcube were launched at about the same time.”
Are there different types of crowdfunding?
BD: “There are, they include unregulated ‘donation and reward’ services, which allow people to give money to projects they care about, and regulated financial services, which offer the chance for some form of investment return. The bulk of crowdfunding in the UK is via regulated platforms offering loans, bonds and equity investments in projects, businesses and charities.”
What’s the difference between ‘debt crowdfunding’ and ‘equity crowdfunding’?
BD: “Debt crowdfunding is where investors receive their money back with interest. This is also called ‘P2P’ or ‘peer-to-peer’ business lending. Equity crowdfunding is where people invest in exchange for equity - shares or a small stake in the business, project or venture. If it is successful, the value increases. If not, the value goes down.”
How many small firms in the UK are using crowdfunding?
BD: “In lending terms, in 2015, platforms accounted for 15% of loans to small businesses - the full range of SMEs in terms of size, sectors and credit risks. The money is commonly used for investment rather than refinance of existing credit agreements. It is also used for asset and project finance.”
Why should I choose crowdfunding over other sources of funding?
BD: “Well, you may not be able to access other sorts of finance, but crowdfunding should not be seen a ‘last resort’ option. The speed of response and service levels from most platforms exceeds that of many banks and so many businesses now see crowdfunding as a first choice.”
So how does the process work?
BD: “Typically, those seeking funds set up a profile of their business or project on a crowdfunding platform website. Then they can use social media and traditional networks to try to attract interest and raise funds. In some cases, your business may have to undergo a credit check or full-scale investment due diligence, depending on the sums you’re looking to raise.”
Might my business be unsuccessful when attempting to raise crowdfunding?
BD: “For a variety of reasons, you may not raise the funds you seek. When you go to the large platforms, if you get approved for the loan, you’re likely get the money. However, for equity raises, it depends on the quality of your pitch and the questions asked by investors.”
What key advice do you offer to small firms?
BD: “First, do your research. Find out as much as you can about setting up a crowdfunding page. The UK Crowdfunding Association website is a great place to start. If crowdfunding is the right solution for your business, shop around to find the right platform and service for your advice needs. Seek professional advice where necessary. You should know how much money you need to raise and what it will enable you to achieve.”