TECH2020
Funding from the crowd
This is a collaborative report by Professor Mark Durkin, Ulster University Business School, Dr Des Laffey, Kent Business School, University of Kent, Dr Darryl Cummins, Ulster University Business School and Dr Tony Gandy, London Institute of Banking and Finance
hen it comes to financing a business, big is best, well that is how it used to
Wbe. Like smaller companies, big firms can retain profits( a slow route to growth) and look for bank funding( usually secured on their assets), but they can also access a global pool of funds through financial markets by issuing low cost bonds or selling listed shares.
This world of marketbased funding is now opening up to small and medium sized businesses, offering new, flexible and openminded sources of investment.
This is an exciting opportunity for smaller businesses. American internet Billionaire Steve Case likened it to providing“ Silicon Valleys everywhere”.
There are a lot of new funding options. They range from the charitable to the harshly commercial.
What is common to them all is the use of the Internet to host a marketplace, where information can be exchanged between businesses wanting funding, and people willing to provide it. If the latter are satisfied with the information they get, the funds will flow.
There are a range of such services, ranging from investmentbased / equitylike crowdfunding to loanbased crowdfunding( peertopeer lending). Many have taken tools developed in the crowdsourcing and creative industry funding sector, such as those developed by Kickstarter, and used them to build a case for business investment.
These online funding markets represent a potential opportunity for companies to find funding whether they have underpinning assets( markets exist for assetbacked finance and even invoice finance) or, are new startups which are intellectually innovative but asset poor.
A research programme undertaken by Ulster University Business School, the University of Kent, and the London Institute of Banking and Finance( LIBF), supported by the Institute for Small Business and Entrepreneurship( ISBE), has been exploring the complex world of small business finance in the context of the new options available.
The research project was very wide, studying the attitudes of small businesses( primarily early stage firms) and traditional bank lenders to the new funding opportunities.
What we found was a wide range of understanding, from those who barely knew about this new world of funding, to those who were slick repeatsubscribers to these funding sites. Some bank business lenders are likewise keen to offer their clients a route
46 www. businessfirstonline. co. uk to these new tools when their own bank products do not fit with the funding requirement, others are either less knowledgeable or even resistant to marketbased funding.
Here we just outline what makes for a good campaign on an investmentbased crowdfunding site.
What makes for a good funding bid on a crowd platform?
There’ s a widely held belief among small business that banks“ aren’ t lending”, that the process is complex and bureaucratic and doesn’ t“ fit” especially with an early stage business.
One startup firm told us:“ The startup world …[ is ] so quick and constantly changing and you don’ t really know what happens, so I think the traditional approach to bank loans doesn’ t fit that world …( so) I think there are better ways to get some finance into a company or a project than going to a bank”.
This creates a big deadend for those businesses less familiar with alternative investment routes. Those firms which we researched which have used crowdfunding were incredibly positive.
Not only can funding be fast, but there’ s a validation of the business in the process. Investors have researched the opportunity, looked at the product and said“ yes OK, I think that will work”.
However, you still have to make your case to investors using the tools available on the crowdfunding platforms, but also extending out into more traditional areas, all to encourage investors that the project / product / concept will work.
The most powerful direct appeal to funders was the video, a tool provided by many reward and equity crowd funding sites and is the focal point for making the case for funding.
Video was often cited as being pivotal to the success of the pitch and attracting funding. It needs to be slick, informative and professional.
One startup we spoke to noted that an investor who provided them with 80 per cent of their early stage funding(£ 45,000) watched the video, but the firm was not even sure the investor really read the formal business plan they sent to him.
Not surprisingly leveraging social media
reach and impact can be useful in gaining funding. However, another key to success is building momentum outside of the crowdfunding site’ s toolkit. One of the clearest statements on this came from a successful crowdfunding user:“ I needed PR quickly – it was a wakeup call.
“ Reviews [ by ] journalists drove traffic to my campaign. You literally need dozens of press releases – by far the biggest reach is traditional broadsheets, not your online bloggers. There is very poor organic find of your campaign. You need to generate the traffic.”
For startups, the new world of crowd / market based finance offers a real opportunity to get resources so desperately needed for new and hard to prove ideas.
That’ s not to say all is well in this industry. Regulators are showing great concern about whether the information provided to investors is transparent and even the trade bodies of the crowdfunding and peertopeer are concerned when such investments appear to be benchmarked against the low returns of a bank savings account.
The risk for investors through these markets is in no way comparable to a bank deposit account! In addition, many of the markets are now dominated by more traditional investment opportunities, such as property, potentially creating a major concentration risk.
However, our research shows these markets for investment do truly provide a vehicle for innovation to blossom and savvy startups know how to use them. Even traditional lenders, again the savvy ones, don’ t see them as a threat, but a new opportunity to develop the companies of the future, which will be good for the economy, and even for the banks as new customers develop from these markets.