Equity crowdfunding market no longer the preserve of start-ups

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Financial Times | Brian Groom | Oct 6, 2015

Alternative finance

For enterprises seeking seed capital or money to expand, intriguing possibilities are on offer by the fast-growing UK equity crowdfunding market, which enables individual investors to buy stakes in companies online — sometimes putting in as little as £10.

Equity crowdfunding websites such as Crowdcube, Seedrs and SyndicateRoom, enable businesses to pitch to communities of backers. They offer companies an innovative route to raising capital, often from enthusiastic customers, and open new investment areas to the public.

Questions have been raised, though, about whether inflated valuations are leaving investors at risk of failing to make a return in proportion to risks and whether in some cases they have adequate protection against dangers, such as heavy dilution of their shareholdings.

The Financial Conduct Authority, which regulates the sector, has warned that crowdfunding is risky for investors, with the message: “you are very likely to lose all your money,” because most start-ups fail.

The sector, barely five years old, is small but expanding. Last year it raised £84m, up from £3.9m in 2012, according to Nesta, an innovation charity.

That was out of a total UK alternative finance market estimated at £1.74bn. The UK is ahead of the US, which is still developing rules for retail equity crowdfunding.

“Equity crowdfunding is quite capable of raising £1bn a year, maybe more,” says Stephen Hazell-Smith, who co-founded Aim and is chairman of Business Agent, a crowdfunding aggregator.

But, he adds: “People will be eagle-eyed looking for failures.”

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There are more than 30 platforms. Nesta found the average amount raised was almost £200,000, with 125 investors putting in £1,599 each.

Augmentum Capital, a venture capital fund backed by Lord Rothschild and Neil Woodford, the fund manager, recently led a £10m investment round into Seedrs, while corporate brokers Numis bought 8.49 per cent of Crowdcube as part of a £6m funding round.

£84m Total raised last year via the UK crowdfunding sector Equity crowdfunding is also attracting established companies. Sugru, a company that makes a mouldable putty, raised more than £3.5m via Crowdcube, the largest platform, in July. ISDX-listed Chapel Down winery, a UK wine producer, raised nearly £4m via Seedrs last year. Crowdcube plans to offer retail investors the chance to invest in London stock market floats.

“It’s about having options and being able to get the money quickly,” says Luke Lang, Crowdcube’s co-founder. “It can be quicker than protracted conversations with venture capitalists and angel investors.”

Companies see a benefit in having customers as shareholders, who can turn into “brand ambassadors” for their products and services. Investors often support businesses they identify with, whether it be craft beer, solar energy or computer games. It is less clear how well that might work for, say, a machine tool manufacturer.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country.  NCFA Canada provides education, research, leadership, support and networking opportunities to over 1100+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada.  Learn more About Us or visit www.ncfacanada.org.

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