When you’re working hard to build Scotland’s first equity crowdfunding platform, it’s critical to have access to every piece of relevant information about how the crowdfunding sector in general is developing. So I was eagerly looking forward to the recent publication of a report commissioned by the Glasgow Chamber of Commerce entitled ‘Crowdfunding – The Scottish Perspective’ (download available here).
I should say at the start that I was delighted to provide some input into the research process carried out by Tim at Twintangibles. But I’d urge anyone with even a passing interest in funding for businesses to read the full report. If you’re pushed for time, I’ve summarised a few of the key points from the Report below.
A no-brainer. Yes.
The Report shows that SME’s are looking for cash for innovation and new product development, followed by expansion, R&D, startup seed capital, working capital, with company maintenance and miscellaneous reasons bringing up the rear.
The Breedon Report estimated the supply and demand of finance for SME’s at £26 billion and £59 billion respectively. With estimates showing that $2.7 billion was raised via crowdfunding globally last year (est. $5 billion 2013), the question is whether crowdfunding can help the 56% of Scottish SME’s who have stated that they’re actively seeking finance.
Yet, on the available statistics, crowdfunding seems to be taking off slowly in Scotland.
Let’s look at UK figures: £200 million raised with crowdfunding last year (est. £300m 2013). With the Scottish economy representing around 8% of the UK economy, you might expect to see a similar proportion of funds raised via crowdfunding (i.e. £16 million). In reality however, estimates show that funds raised north of the border last year might be significantly lower – perhaps even as low as £1 million.
It’s encouraging to read that people do seem to be aware of what crowdfunding means in general terms. But dig a little deeper and it’s not all positive. The Report identifies a lack of detailed understanding about the different types of crowdfunding (reward, equity, peer-to-peer lending and donation-based). Although P2P lending is the most successful type of UK crowdfunding in terms of funds raised, it is the least-well known. The highest profile model is reward-based crowdfunding – no doubt due to the high profile of Kickstarter.
Part of the reason for this limited awareness might be the fact that there are very few platforms based in Scotland. At this point in time, none that provide the ability for companies to seek equity crowdfunding – something that we’ll change with the launch of ShareIn of course.
Encouragingly, there’s evidence that institutions and organisations are starting to understand crowdfunding – whether that’s in the form of the West of Scotland Loan Fund becoming increasingly comfortable about match funding against cash raised via crowdfunding methods or banks that are increasingly recognising it as a viable alternative in situations where they are unable to lend funds.
I’ve blogged about it before so I won’t simply repeat myself here about why it’s so important for us to make sure high growth companies can access funding. But the Report confirms that the UK is identified as a leader when it comes to equity crowdfunding. We might have complex legislation but the reality is that crowdfunding via equity is often heavily regulated and only allowed in certain countries. In the UK, we’re seen as being at the forefront of developments. For example, the US are experiencing tortuous difficulties in enabling the JOBS Act.
Equity crowdfunding campaigns in the UK raise around £150K on average. Compare this with the average figures for P2P lending (£50K) and donation (£22K) campaigns. The larger sums will tend to be more attractive to high growth businesses.
As you would expect, it’s also important to appreciate that the average size of investment per individual is much smaller than traditional investment methods when using equity crowdfunding. The model works because of the long tail, as shown by the research which indicates that the average sum invested per equity crowdfunding is somewhere between £600-£2,500 – significantly lower than if the money had been raised using more traditional methods.
Is Scotland Different?
At this stage, it’s impossible to collect ‘Scottish’ figures accurately. Yet there is one point that is hugely important to all of us here at ShareIn – and indeed was a major part of the reason why we’re committed to getting our platform up and running successfully. To quote directly from the Report:-
“…no Scottish project has successfully raised equity crowdfunding on any of the main platforms”
This is astounding to me, clearly identifies the need for progress to be made and provides yet more evidence that there’s a demand for a platform such as ShareIn that can facilitate this process. It certainly looks as if Scotland is behind the crowdfunding curve.
Now that it appears to be commonly accepted that crowdfunding will become an increasingly important part of the funding solution for many growing companies, it’s my hope that this Report will act as a clarion call for us all, within the crowdfunding industry and further afield within the wider business community, to work to encourage a greater understanding of crowdfunding and where it can be used to help businesses succeed.
It’s great to see Twintangibles making the initial foray into collating the information that’s so badly needed about crowdfunding in Scotland. It’s clear to everyone that the sector is on the cusp of explosive growth. We now have a solid base to accurately assess what’s going on and I for one will eagerly await any updated reports in the future.