Do you follow the crowd? Part 2

Following on from our Thursday blog, today we explore two more routes that budding entrepreneurs could pursue in terms of the increasingly popular crowdfunding concept. Previously, we looked at the donation-based and rewards-based options and today, we look at equity-based and debt-based crowdfunding. 

Equity-based Crowdfunding

This type of crowdfunding is when a company gives away some of their shares in return for investment. The investor then becomes a part-owner in the company and, providing that it is successful, they will receive a share of the company profits in the form of dividends. For the crowd, this is a longer term return on their investment but potentially more lucrative. 

You may have heard of Crowdcube, the world’s first equity-based crowdfunding platform, and the first regulated equity-based platform to date. Crowdcube applied for its FSA authorisation in 2011 as a vital step to its long term success in the UK. The FSA recognise the importance of crowdfunding as a source of finance for UK businesses and helps communities like Crowdcube increase investor confidence by adding additional protection. 

Since its inception the pioneering platform has raised £5M for UK businesses. A good example of a Crowdcube success is HAB Housing, a business established by writer, designer and broadcaster Kevin McCloud. HAB Housing, a development company looking to expand into the custom-build house market, proposed a target of £1M through the equity-based crowdfunding platform. Investments start from as little as £100 in return for a dividend of 5 per cent, and a 5 per cent saving on any purchase of a HAB home on their level of investment. Its final investment total reached £1.9M setting a new equity crowdfunding record. Its journey was filmed by Channel 4, in a two-part TV programme, and if you’d like to watch its pitch click here.

Check out a few organisations that focus on equity-based funding: CrowdCube, EarlyShares, Y Combinator and Fundable.

Debt-based Crowdfunding

Debt crowdfunding is when a company actually borrows from the crowd with a legally binding commitment to pay it back with interest and within the timeframe specified. This can be a cheaper alternative for businesses than traditional bank loans because there is generally a lower cost for the financing.

SoMoLend’s COE Candace Klein told about the types of businesses that this option works well for. “We are usually targeting consumer-facing brick-and-mortar companies: restaurants, retailers, salons, gyms – that already have customers, already have cash flow, and can service debt. Typically we look for a business that is at least a year old and has at least a year’s worth of receipts.” 

If this sounds like it could be for you, here are just a few of the sites on which to explore this option further: SoMoLend, Lending Club, and LendAcademy.

So what does the future hold for crowdfunding? Well, we believe that the future is certainly bright for community business investment and we already encourage our Catalyst Centre tenants to consider these options as ways of obtaining sorely needed backing for their businesses. 

However, be warned: whilst the crowdfunding platforms themselves have become more sophisticated the same is true of the investors behind them. Increasingly investors are becoming risk-averse and consequently they will want to know more about the people behind the business or idea. They are likely to conduct their own research and share their findings amongst the rest of the community – whistle-blowing could become the norm. Transparency will therefore become a prerequisite to getting backing, with an almost ‘Ebay type’ approach to making participants’ performance history freely available. It is also said that communities will grow among backers with rewards being contrived by the investor rather than them being specified by the business.

Peer to peer debt-based crowdfunding is likely to become normal practice, especially all the while it is difficult to obtain money from banks. For product based businesses, this could be something that they tap into again and again to fuel their growth. 

Of course, we have only been able to give a brief overview of four crowdfunding concepts in this blog so why not delve further with the links we’ve provided? You may also like to keep an eye on this blog as we will shortly reveal what you need to know before you jump in and start your own campaign. We’ll also be revealing all as Catalyst Centre tenant RocPro will soon be launching its Kickstarter campaign on the basis of crowdfunding success.