Let’s get it straight – Crowdfunding is not one thing.

We seem to be plagued by a fundamental misunderstanding when it comes to Fintech. Numerous reports on its growth lump all the various elements together. It’s about as useful as telling a farmer people are eating much more. He wants to know what they are eating.

Growthdeck: Let’s get it straight – Crowdfunding is not one thing.

So crowdfunding is not a term that covers much to do with business finance. When you read a headline that crowdfunding is growing exponentially, you need to ignore it. Crowdfunding is the type of activity that Kickstarter and Indiegogo have made such a success. It has been going for well over 10 years and is now a massive movement – but it has very little to do with financing start-ups and SMEs.

It is essentially a straight swap - cash for reward. So, for example, the latest Fintech innovation, a payment ring, used Kickstarter to fund some of its development stage. They sold the ‘ring’, which at this stage was only an idea, to punters at a discounted rate to the RRP. The ring is now live and the punters have been satisfied – many obtaining their precious ring at a 50% discount. But this funding hasn’t launched the ring – it merely gave the idea an initial leg up. Sums involved tend to be small, the ring raised just over £100,000 this way.

The difference between this type of crowdfunding and equity crowdfunding, as operated in the UK, is that the latter exchanges shares for cash. You purchase a piece of the business, so that if it is bought, or launches one day on the stock market, you can cash in. You may also receive rewards, but these are just a bonus. The sums involved are much larger, with many companies raising over £1m to fund their businesses.

A third type of Fintech funding for SMEs is P2P lending. This is where a platform facilitates punters lending their money to businesses over a fixed term and at an agreed interest rate. With returns from banks being negligible, it has taken off. Figures for 2016 show lending reached £3.2bn, up 37% from the previous year.

So to lump all of these very different forms of business finance together gives us a very skewed picture. P2P is by far the larger partner on the business finance side – dwarfing the equity crowdfunding totals. Pure crowdfunding continues to grow, despite the rising numbers of campaigns that have never produced their intended product. It remains an important source of initial seed funding to take an idea through to prototype. Now Indiegogo has stepped into the equity side as well. P2P tends to be for more established businesses as there must be some track record to create a semi secure environment in which to lend. So equity crowdfunding has been left with the highest risk sector – the start-ups. That’s why it needs professionals who understand the market to run the platforms.

Insolvency in the UK

A problem area that equity crowdfunding has highlighted in the UK are the actions taken around company insolvencies. That concept might be better expressed if one used the word ‘inactions’.
Insolvency firms take an incredible length of time to come up with the required documents and file them - often more than 12 months. Now if we were talking about a complicated multinational, then this would be understandable. But most equity crowdfunding failures are relatively small and simple businesses. The problem here is that whilst the insolvency firms are working on the structure of the possible new deal or the ultimate closure, they get paid. Once the deal is done or the company is closed, they stop being paid. So, it doesn’t take much sense to work out why they drag these procedures out…

The delay doesn’t help the creditors, which is supposed to be the insolvency firm’s main aim. There are several businesses funded via equity crowdfunding that have been in administration or moved onto liquidation years after first instigating the move with Companies House. It’s another case of the old system not being able to keep up with the rapid rise of modern technology.

Finally, if anyone expects company directors that misbehave to be accountable, we need to do something about the way they are brought to justice. Expecting a witness to travel for 4 hours, in his own time, to give evidence in the defendant’s own backyard, 4 years after the event took place, is definitely going to put people off coming forward. It’s just not worth the hassle.

No one wants to put a barrier in the way of genuine entrepreneurs starting new businesses. In fact, quite the opposite should be the case. But if we had a simpler system to bring the cowboys to justice then this would deter them from trying in the first place. There is evidence that equity crowdfunding has facilitated some very dubious people in raising funds. When the inevitable collapse comes, they walk off to try it again. That cannot be helpful.

Dexster Growthdeck: Dexster

22 June 2017


Who is Dexster?

Sometimes controversial, always trenchant, Dexster is Growthdeck's resident blogger. Dexster will bring you his/her views on the crowdfunding scene covering a wide range of topics, including the growth of the equity crowdfunding industry, the risks faced by platforms, how businesses are faring, what investors need to look for when choosing a provider and much more.

Note: The contents of this article are the author's opinion and have not been approved as a financial promotion.