Forbes | Trevor Clawson| January 9, 2014

What happens when ‘alternative finance’ goes mainstream?

That’s the question facing the assortment of entrepreneurs, financiers and technical wizards behind the rapid growth United Kingdom’s business-focused crowdfunding industry as they look ahead to 2014. After three years of rapid growth, equity investment, peer-to-peer lending and invoice trading via crowdfunding sites are now established as serious options for startups and small businesses in search of finance. But as more money pours through a growing range of online platforms and into the bank accounts of young and often high risk companies, questions of investor protection have come to the fore.

The UK’s crowdfunding pioneers have a lot to celebrate. According to a report published by innovation charity NESTA in collaboration with Cambridge University and the University of Berkeley, alternative finance intermediaries raised almost £1bn in 2012, an increase of 91% from the previous year’s figure of £492m. Beneath that broad umbrella, equity-crowdfunding platforms enjoyed growth of 618% in business volume while peer-to-peer lending site saw the value of deals rise by 211%.

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In cash terms, the numbers remain relatively small. The report – entitled The Rise of Future Finance – estimates that peer-to-peer lending volumes totalled £287m, with the figures for invoice trading and equity crowdfunding coming in at £97m and £28m respectively. Meanwhile, donation sites raised £310m.

That’s fairly small beer when compared to, say, bank lending to small and medium sized companies, which, according to British Bankers Association figures amounted to more than £7bn in the third quarter of 2013 alone,

But crowdfunding in particular and the alternative finance market in general is filling an important niche in Britain’s funding ecosystem. The NESTA report estimates around 5,000 SMEs have accessed early stage, growth or working capital via alternative platforms since 2011. Often these are businesses that would have found it difficult or impossible to access traditional bank, angel or VC funding.

The market is rapidly evolving. Back in the early days of 2011, there were three prominent players outside the donations platforms, namely equity crowdfunder, Crowdcube, peer-to-peer lending site, Funding Circle and invoice trading specialist, Market Invoice. Since then new platforms have emerged, each with their own variation on the crowdfunding theme.

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For instance, while Crowdcube provides a range of seed, early stage and growth capital,  Seedrs focuses primarily on the seed funding. Then there are sector specialists, such as Abundance Generation (renewable energy projects)and Crowdmission (social, environmental and biotech investment). Meanwhile, Angels Den and Syndicate have created platforms combining elements of crowdfunding with professional angel investment.

Facing the future 

What all this amounts to is a lively and diverse market, which also includes donations and rewards-based crowdfund platforms. But there are challenges ahead if the industry is to continue to expand.

According to some commentators, the biggest challenge is the impact of business failure coupled with regulation. Back in July 2011, fair trade beauty Products Company Bubble and Balm raised £75,000 on Crowdcube. Last year it ceased trading. The news fed into a debate about whether inexperienced and relatively unsophisticated investors should be putting their hard-earned cash into businesses and projects that carry a fairly high degree of risk.

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