LOOKING TO THE CRO
Access to funding isn’t getting any easier for the UK’s small and medium sized enterprises, aka SMEs. With most businesses unwilling or unsuited to raising traditional venture or growth capital, and with a scarcity of bank loans and overdrafts, there’s an increasing focus on the alternatives. To an extent, asset-based lenders (banks or others who provide invoice or asset-based finance) have stepped into the fray and tax-incentivised business angel activity appears to be increasing, but there’s a never-ending demand.
Enter crowdfunding, the process by which people pool their resources to support a cause, often associated with disaster relief or sparked by an individual tragedy, but now increasingly adopted by businesses seeking working capital finance, loans or even equity.
The business crowdfunding bandwagon is only just starting to roll. Much of the activity has been driven by the internet, which enables campaigns to be spread far and wide or within defined or captive communities. An early example (1997) was the British rock group, Marillion, whose fans conceived and managed a fundraising of $60,000, underwriting the band’s US tour. Since then Marillion have used the technique to fund the recording and marketing of several albums.
Another example of crowdfunding is the issue of retail bonds. In 2010, using a largely captive model (its customers), Hotel Chocolat famously offered a three year, FSA-approved ‘chocolate bond’ to the 100,000 members of its tasting club. Customers were invited to invest £2,000 for a gross annual return of 6.72%, or £4,000 for a return of 7.29% - all paid in regular deliveries of chocolate. This had the advantage of raising the company’s profile, winning it new customers and raising £3.7m in the process.
Caxtonfx, the foreign exchange company, used a similar 54 entrepreneurcountry
approach with its customers in 2011 to raise a £4m bond. Mr & Mrs Smith, the award winning travel website and hotel booking service, followed suit in 2012, raising twice their hoped for minimum. In Mr & Mrs Smith’s case, nearly half opted for ‘Smith loyalty money’ at 9.5%, rather than the offer of 7.5% in cash, giving a further boost to their business.
Using a captive crowd is only half the story, however. The big crowdfunding sensation of 2012 is Pebble Technology, a Palo Alto based smart watch company, who used US-based crowdfunding platform
Kickstarter.com to raise a minimum of $100,000 against forward sales of its Pebble watch. The offer closed on 18th May 2012, by which time the company had raised over $10 million from more than 68,000 backers.
Reward or debt
For businesses, there are essentially three categories of crowdfunding: reward-based, loan-based or equity-based.
Pebble is the most successful example of the reward- based model so far, where the crowd agrees to donate to a business or project in exchange for tangible, non- monetary rewards such as watches. Simon Dixon, a UK- based entrepreneur who has recently launched his own crowdfunding site,
Banktothefuture.com, says that there’s already an established route to success. “To be successful in crowdfunding, there’s a simple formula, £££=R+SC+E, where the amount of money you will raise depends on the strength of the rewards you offer (R), how much social capital you have (SC) and the emotion attached to your story (E),” says Dixon.
At the more sophisticated end, MarketInvoice has developed a new and innovative funding platform where businesses can selectively auction individual invoices to a network of
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