What is crowdfunding and how does it work?

Crowdfunding    is the collective effort of individuals who bypass banks and pool their money   to support the efforts of others. It could be a new business, a community enterprise or an arts project.

Crowdfunding is now growing rapidly and in 2012, there were over 300 crowdfunding platforms across the world raised $2.7 billion, an 81 per cent increase over the amount raised in 2011. Now, there are now over 500 crowdfunding platforms with an estimated volume of $5.1 billion predicted for 2013 according to Entrepreneur

Many start-ups and social projects use crowdfunding to part-fund  their charitable activities, or to expand an existing business.  Money can be in the form of donations, shares or interest based I.O.U’s (see each of these three sections below). Typically, the sums are small – as little as £5 – while the ‘crowd’ is large; for what defines such crowdsourced funding is the strongly ‘social’ aspect of investment. Donors and investors are also members and supporters who have an emotional or social tie to the project through bulletins and updates as well as interaction with each other online and off. As Phil Geraghty, Managing Director of Crowdfunder says “ [It] is the ability to create a sense of community and raise funds at the same time….your backers become your customers”.

For a social enterprise and for-profit business seeking to crowdfund a project or a new expansion, these are the steps common to most of the platforms I looked at:

1. Create a profile you may need to fill out a disclosure questionnaire and, if a business, to submit a business plan and financial forecast. If you list your project as an equity project, you need to be a UK plc. but even here you may get help with Crowdbnk offering to walk you through the steps. Such additional support may incur a cost and certainly Crowdcube offer a whole range of additional paid support services for businesses   with fees for financial forecasting starting at £299
2. Prepare a pitch – for example a YouTube video with supporting text.  You will often be given upfront support to help you design and build your campaign. However if you are a business or social enterprise, any pitch must be backed up with a proper business plan and financial forecast. For businesses and social enterprises using Bank To The Future, you will find this platform places particular stress on creating a profile and planning, submitting and promoting your pitch.
3. Set your target – beware! Funding is on an ‘all or nothing’ basis. This is usually time limited and when you set your target you have to hit it within a given date or all funds are returned to donors, so be realistic!
4. Spread the word: social media tools such as Facebook and twitter are embedded in crowdfunding platforms. In some cases you also have access to users who have already registered on a particular site.
5. Get funded: donations and investments are put into an online holding account. These are not released until you have met your target within the time frame
6. Grow your project: this is about growing and engaging your support base during and after the funding target has been achieved – news and updates as well reward schemes all help to maintain engagement. Again you will usually be given support and advice on ways in which you can reward your backers with money-can’t-buy experiences.
7. Post- investment – businesses may be tied to the crowdfunding platform in terms of managing shares and dividends. This may be a benefit as well as a constraint and Seedrs state that they hold shares as a nominee for underlying investors and manage dividend payments and share floats on your behalf
8. Pay your fee: A percentage fee is paid to the crowdfunding platform once the target is reached. You will also likely pay a registration fee of say £25 – However you need to check the details.

While crowdfunding clearly has huge potential, it is not an easy option to traditional funding and hopes can very quickly be dashed when support from friends and the wider community fails to translate into money donated or invested: of the sample dozen business pitches I looked at, many had fewer than 100 investors /donors and only a couple went on to build a community numbering thousands. It’s a new form of financial investment after all, and times are hard for everyone so it may take a while for people to adjust and engage with such platforms.

There are three different types of crowdfunding: donation, debt and equity.

Donation based crowdfunding

People invest for a cause or charity they believe in. It could be a theatre project, a film an arts event or a new community building. There is no financial return to the people putting money since the motive for giving is a social goal or wider benefit for the community but there is often a  reward in the form of an acknowledgements on an album cover, tickets to an event, a free gift as well as  regular news updates

Donation based crowdfunding platforms

The big ones are Kickstarter and Indiegogo. Kickstarter caters specifically towards creative, project-based campaigns such as Art, Dance, Design, Fashion, Film,   Technology, or Theatre.   Indiegogo has looser guidelines and will allow for the crowdfunding of anything – projects, trips, charities, and personal wishes.

UK Sites include:   www.buzzbnk.org  www.crowdbnk.com     and www.gambitious.com    http://www.crowdfunder.co.uk

Example projects:

• A local authority partnership with Crowdfunder. Crowdfunder is a UK based crowdfunding platform has recently teamed up with Elmbridge local authority to create  Crowdfund Elmbridge. It enables people and businesses to donate to community projects; anything from sports equipment to improving a community building or a new venture. Anyone can donate as little as £1 and possibly get a reward from the project owner as a thank you. This is a new initiative but the fact that it has the backing and leadership from the local council, who are a co-funding partner, gives it a high profile endorsement that is likely to benefit multiple small community initiatives seeking funds.
• CrowdFund Cornwall is another partnership between Crowdfunder, Plymouth University and the Cornwall Community Foundation. Crowdfunder administer £50K worth of matchfunding on behalf of Cornwall Community Foundation for a range of  small community projects – provided the projects  meet the community foundation’s criteria and are able to fundraise an equivalent amount themselves
• A Food initiative: Support the MVP The Manchester Veg people successfully raised over £16,000 from 121 backers to buy a large van, cold storage facilities, pallet trucks and benches. They are combining this with 40% EU matchfunding for every pound donated. MVP is a co-operative of growers and buyers who work together to create trust and understanding built around a fairer food system that takes account of the Environment and the challenges posed by climate change
• Energyfunder: This is a group of 8 projects run as a campaign and like the partnership with Elmbridge Council, Crowdfunder has teamed up with Energyshare to push forward a range of related initiatives – of which the MVP food initiative (above) is one.  Curiously, none of the projects involved renewable energy but food was a strong theme with Transition Reading successfully raising £350 to plant edible nut trees for a public park. This campaign is current and Crowdfunder are on the look out  “for brilliant energy ideas that will save money, generate energy and benefit local communities”. Hint! anybody in TTL willing to give them a bell?
• The People’s Supermarket  in Oxford is a sustainable cooperative run for local people by local people. It not only seeks to offer ‘high quality health food at sustainable prices’ but also to offer ‘training and life skills to the local community’ as well as ‘buy sustainable energy’
• Sara’s Sustainable Fashion Project which seeks to ‘up cycle’ clothing and textiles that otherwise end up in landfill waste.

Equity based crowdfunding

People invest money in exchange for equity.  You buy shares in a business or project or venture and you get voting rights on certain decisions, along with a dividend from the company’s revenue. You also get a share of the value in the company when shares are sold.

As an investor, you also run the risk that the company may fail and you lose all your money.

As a business, you do need to register with Companies House as a limited company but you don’t need to be a PLC – see FAQ’s at Crowdcube.

UK Equity based crowdfunder platforms include: www.banktothefuture.com  www.crowdbnk.com , www.crowdcube.com , www.gambitious.com , www.microgenius.org.uk www.crowdmission.com  and www.seedrs.com .

Example projects

• Sourced Market which opened in St Pancras station in 2009 is looking to raise £700,000 has built its business and brand reputation on high quality, locally sourced products. It now wants to open another retail site in central London using the crowdsourcing platform Crowdbnk to do so. Take a look at its profile, business plan and share option here>>
• Street Studio in Brighton is looking to raise £150,000 for a live working art studio within a retail shop and gallery in the heart of Brighton.
• Quantock Brewery in Wellington Somerset surpassed its  £100,000 target, raising £120,000 from 129 individuals
• JCC Community Woodheat renewable energy project. It is a community energy co-operative which seeks to raise over £638,000 in order to install woodfuel boilers for the sale of renewable heat to the John Cleveland College in Hinckley, Leicestershire

While food and drink business projects seem more attractive to investors than other projects on Crowdcube , a quick glance down the list of pitches on their site, suggest that many will struggle to reach their target funding goal within the time frame set

Of the 12 business projects  on Crowdfunder (some are micro businesses or social enterprises), asking for between £250 and £17,000 with only 7 days left to meet their target, only three had made it, with little likelihood that the remainder will   bridge the financial short-fall in so short a time; that’s a pass rate of 25%! (true at the time of writing)

Debt crowdfunding

Otherwise known as peer-to-peer lending. Crowds lend their money in small increments to project owners and businesses via the platform and expect repayment over time with some fixed rate of interest. Many businesses view it as a viable low cost alternative to the complex and time consuming process of getting a bank loan but debt crowdfunding platforms lean towards UK limited companies rather than sole traders.

Crowdfunding sites incude: www.abundancegeneration.com , www.banktothefuture.com , www.buzzbnk.org  and www.trillionfund.com

Example projects:

• The crowdfunding platform Abundance Generation  has launched its first fixed return renewable energy project. The project, SunShare Community Nottingham, has a target of £896,000 and you can invest as little as £5 to invest. The project will involve refinancing the installation of already operational solar energy panels on 20 community buildings in Nottingham, each associated with children’s development, and will pay investors an effective rate of return of 6.5% over the 19-year life of the investment.
• Sunshare Social Homes has a  1.847MW  solar energy project whose application has been approved and whose debenture status is ‘under consideration. When you have logged into your dashboard, you can offer a ‘pledge of support’ – this is not a monetary commitment, just a way of saying you are interested and you support this project in principle. When you click the pledge button it asks you to ‘tweet’ and ‘Facebook like’ to all your friends, both of which you can do from your personal dashboard once you have logged in.

Abundance Generation are careful to point out the risks in any investment.  The sorts of things that could result in an Energy Project getting into trouble are:

• A significant collapse in the price of energy
• Extended periods of lower than expected energy production
• Extended operational failure not covered by normal maintenance warranties and contracts

There are also more specific risks laid out in the Offer Document that is submitted with any crowdfunding project.

Way Forward

It is likely that there are any number of projects and business initiatives that could benefit from this approach. However to really launch an effective crowdfunding campaingn for Lewes businesses and charities will likely require a range of stakeholders working together. A local authority who can co-partner with a Crowdfunding platform would be an ideal way forward and  Crowdfunder seem to offer partner programmes suited towards this end. But other stakeholders are also important; The Railway Land Project, Transition Town Lewes, The Friday Market, Common Cause, the Chamber of Commerce, The Hive, 3VA, The Lewes Pound – all are potential stakeholders who could promote projects of benefit to the wider community and local economy with monetary as well as  non monetary human and material resources.

Such  high profile leadership by key local institutions may do much to familiarise and encourage local giving and investment by local people  in local businesses and social enterprises that directly benefit economy, community and the environment.

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