Crowdfunding: An arriving and welcome phenomenon

The rise of crowdfunding can only be sustained if we keep the nanny state out.

Five years back it’s a fair bet that you would never have heard of crowdfunding. Today new platforms are proliferating at a rate of sites per week.

‘Good works’ sites, where people are asked to subscribe to a project to do good, can range from building a hospital in a poor economy to space projects. Here, whilst you might get a bed named after you or a free video from space, the motive is more noble than just profit.

However, most sites now deal in providing finance for businesses with a view to commercial return. Typically it’s some form of loan capital (Funding Circle) or equity (Seedrs) – with the market already getting more sophisticated with more complex funding such as asset-based funding and invoice discounting (Pegasus) being increasingly available and provided.

Many people have an image of crowdfunding being all about start-ups, but that is increasingly untrue with well-established businesses raising quite significant sums – £1 million is not rare. The idea evolves quickly!

The idea is great. A very large number of people have easy internet access to diverse opportunities. The low costs of operation allow people to invest in amounts as low as a few pounds with relatively little tedious processes and low overall executor costs of investment.

However, it really only works well if we keep the nanny state out. In a society that allows you to lose your family home by betting on horses, it seems strange that there are those who think we need the full (if largely fruitless) rigour of anti-money laundering and investor protection to apply to people investing £25. If we allow heavy regulation in, then crowdfunding will become limited to much larger amounts (say £25,000 plus) by the dead weight of regulatory good intentions.

Regulating Risk in Crowdfunders

Interestingly some of the strongest advocates of increased regulation are the best-established crowdfunding sites. In part this will be because it will be easier and proportionately less expensive for bigger players to comply with regulation – thus making it harder for new entrants and better for the existing sites.

Nobody wants to see crowdfunding used to launder drug money or to be used by fraudsters to steal money the easy way – so some sensible level of control is needed.

The hardest bit is for investors to assess the risks and opportunities that are on offer.

Very poor deals will likely be obvious from the poor presentations they post on the net, but sadly good presentation skills do not always make a good business.

The site manager can sensibly do useful things like checking if the directors are banned, the company has filed accounts and documentary checks work.

However, the investor will always be at risk from weak business ideas, poor execution and plain bad luck. Investors can and do help each other on some sites by posting what they have learnt or know about a proposition. Web casts with management help too. Canny investors will use all those tools and more – the internet contains lots of information about people, businesses and technology.

As an aside, fraudsters have so far not been very visible in the crowdfunding market – but they will come.

Over time I expect that the crowdfunding sites that do best will be those that attract the best businesses and reduce failure by their checking of propositions. They will also have the best legals to help protect investors post investment so that less scrupulous souls cannot sell the businesses to their lovers at an underprice or raise dilutive funding – as yet there is little experience in the UK as to how the post-investment phase will work out but wise investors should think about it before investing.

Crowdfunding is here to stay. But it is evolving and very welcome.

More on crowdfunding:


Jon Moulton

Jon Moulton is Chairman of the Better Capital fund vehicles.

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