It was credited with bringing US President Barack Obama into power in 2008. Crowdfunding, also known as social funding, attracted lots of relatively small campaign donations that amassed to make the biggest-ever election war chest for a presidential candidate.
In the current tough lending environment, UK businesses looking to find other avenues of finance can now implement the same strategy – or so the theory goes.
Luke Lang, co-founder of Crowdcube, which launched in March, says the business has taken the notion of crowdfunding ‘a step further’. Rather than backing social or arts projects – the main goal of similar sites such as Kickstarter in the US – Crowdcube offers ‘ordinary people’ a shareholding in high-growth businesses.
‘We want to enable people to have a real share – real equity in the business,’ continues Lang, a former marketing manager. ‘We want to make investing open to everyone so that the ordinary man or woman in the street can invest in a limited company.’
Lang and business partner Darren Westlake came up with the idea while watching the BBC TV show Dragons’ Den. He says that seeing good businesses fail to attract finance made them believe that there was a ‘better and more democratic way’ to fund entrepreneurs.
The website launched with six businesses, which have each submitted a video pitch, images and supporting documents. The general public can invest from £10 to £5,000 in the companies, while sophisticated investors or people of high net worth are able to invest more.
Lang maintains that before allowing businesses to advertise on their site, all background details and business plans are thoroughly checked, and Crowdcube only takes a cut when the business is successful in reaching its fundraising targets.
There are a number of variations on the theme of social funding for social enterprises. Another website, Funding Circle, specialises in arranging debt, rather than equity finance.
Co-founder James Meekings says investors can select the businesses they want to lend money to by themselves or allow the organisers to build a diversified portfolio of loans to limit risk. Target returns will, of course, be significantly higher than those available from deposit accounts.
Scottish entrepreneur Amanda Boyle takes a similar line with her crowdfunding website Bloom VC. However, the site won’t offer equity or debt.
‘It is a site for donations and patronage,’ Boyle elucidates. ‘We don’t use the word investment. It is very much a case of people setting up a venture, and needing a leg up to do it.’
After a soft launch in March, a fully functional website is planned for October. Boyle says that she will focus initially on Scottish businesses. It’s early days yet for all these sites, and it remains to be seen how successful they will be.
But as Boyle remarks, ‘It would be a shame if bright ideas got lost, because people might have to wait six months or a year for finance, or get jobs and give up the idea altogether, for the sake of a few thousand pounds to get started.’