Crowdfunding is booming, but is it sustainable? Just what new markets can it tap? and what happens if the banks decide to get involved?
Simon West, Director of Tomb Raider, has taken a new tack with his latest film, Salty. He"s using SyndicateRoom, the equity crowdfunding platform, to offer investors a share of the film"s returns. It"s been a smash hit already - in April the total pledged had reached £2.24 million, making it the most successful UK crowdfunding project ever.
While West"s idea to offer members of the public a share of the film"s returns is a new one - yes, that came as a surprise to us at BL as well - the wider crowdfunding model certainly isn"t. The first dedicated crowdfunding platform, ArtistShare, launched back in 2001, and was designed to help artists go direct to fans to fund projects. It was a revolution in democratising funding. But the model really took off with Indiegogo in 2008 and Kickstarter a year later. It"s now rapidly becoming a mainstream funding option for business too - take UK equity platform Crowdcube, which has raised more than £55 million for more than 185 small businesses.
Crowdfunding is a simple model: you pick a platform and create a campaign explaining exactly what you want to fund - a project, product or business - and letting potential investors know what"s in it for them. On sites like Kickstarter this will be a set of rewards related to the product, like a free ticket, say, or a product ahead of its official release. On others like Seedrs or Crowdcube, funders" money buys them equity in the business.
Crowdfunding"s cousin, peer-to-peer lending, operates in a similar way, but instead of coming together for rewards or a slice of equity from a project or business, lenders pool together to offer a loan, and get returns in the form of interest - the same as any regular loan. With both models, it"s a matter of pressing "go" and waiting for the cash to roll in - if you"ve done your homework, that is.
With crowdfunding enjoying massive growth, this all begs the question: what next?
Will the banks get involved?
Crowdfunding and peer-to-peer lending are now regarded as a truly credible source of alternative financing. According to a report by Cambridge University and Nesta, it"s actually the fastest-growing such source in the UK, growing by 410 per cent between 2012 and 2014, from £267 million to £1.74bn. Some 2,500 people attended the 2015 LendIt conference for crowdfunding and peer-to-peer lending in New York. That"s up from a mere 350 the year before.
But the popularity of such models shouldn"t be a surprise given the state of the credit landscape following the financial crisis. Banks have retrenched, making credit much more difficult to come by. Even companies that would have previously easily secured loans may now struggle. And this has naturally presented a glaring opportunity to other new players.
“The credit market has been significantly disrupted by prolonged record low interest rates, and new players, such as specialist banks, pension funds and peer-to-peer lenders, are becoming much more aggressive in the market,” says Ben Thomason, Director of Asset Leverage Consultants in Jersey.
One peer-lending platform rivalling the banks is Funding Circle, which launched in the UK in 2010 with the stated aim to revolutionise "the outdated banking system and secure a better deal for everyone". It has so far provided business loans of over £600 million.
But Funding Circle isn"t alone - plenty of other platforms are moving in to crowd the space, and it"s not just individuals who are fronting the cash. “This year [2015] is a bit of a turning point,” says David Bradley-Ward, who founded Ablrate, a peer-lending platform that provides asset finance to businesses. “With the wave of institutional money coming into the marketplace now, it"s difficult for the banks to ignore.”
These new platforms have one other key advantage over banks - speed. They seem to be free of the traditionally burdensome processes that weigh the old guard down. “We act within two weeks,” says Andy Whelan, Co-founder of Sancus, a direct lender based in Jersey. “A bank will take months to tell you that no, they"re not doing it. That"s very frustrating for borrowers, so they don"t mind paying higher rates [from nine per cent] to ensure the deal is done - and done quickly.”
Yet the incursion of these new players into the banks" territory doesn"t necessarily mean competition. While some platforms may wind up applying for banking licenses in the future to extend their operations towards deposit-taking, others will be absorbed by the banks, which are already in a position to handle the heavier work while satisfying the regulator.
But there"s also the option to collaborate. “We can work hand-in-hand rather than compete,” says Brian Bartaby, Founder of property funding platform Proplend. “Banks have their own problems, and they need to recapitalise their balance sheets. They want to wind their existing loan books down, and we give them a way to offload those loans and keep their existing customers.”
Whelan cites a similar experience. Sancus"s loans provide the bridge to allow existing companies to get through a transition period, but once that risky period is complete, banks will be happy to refinance. So maybe it"s not such the battleground it may appear to be - yet.
“Banks are definitely trying to be supportive,” says Whelan. “We"re not a threat yet. Peer-to-peer and crowdfunding still only accounts for less than one per cent of global lending, and the government has been telling the banks that loans they decline should be passed to SME lending platforms. Hence you get the British Business Bank funds heading to us, and we lend it to SMEs. That said, we will become a threat - we can get approval for a personal loan in 24 or 48 hours. At the consumer end, these platforms will be worth £40bn in the next five years.”
Food for thought for the traditional banking model, no doubt.
Crowdfunding goes niche
The most famous crowdfunding platforms have a very wide reach. Launch a product on Kickstarter, for example, and a business is likely to be competing for attention with anything from antler crafts to something described as "an evening-length dance by Michelle Boule".
However, niche operators are now setting up with a more focused offering. FundingKnight, for example, specialises in property bridging and renewable energy loans. Proplend offers people five to 10 per cent interest a year to lend directly to the owners of commercial property.
“Real estate loan syndication has been around for years, but our model allows the man in the street to get involved in what"s always been an institutional asset class,” says Bartaby. “People aren"t making much in their bank accounts, and they"re desperately seeking yield, so lending like this is appealing. Those seeking loans benefit because they"d otherwise have to go to a high-street bank, and those loans aren"t around any more.”
Meanwhile Ablrate has set itself up as the only platform offering investment in leases, and specialising in aviation finance for regional airlines.
“Raising finance for a major airliner is straightforward, but when you"re financing a 50-seater turbo prop in Tahiti the market for finance is a little bit thinner,” says Ablrate"s Bradley-Ward. “Banks in the regional aircraft sector have pulled out because of Basel III, and some of them haven"t come back. If they have, they"re now looking at lower loans-to-value. So it"s all opening up the market to investors and institutions who"d never thought of the aircraft industry before.”
It"s reasonable to assume niche operators have a better understanding of the markets they operate in than a more general lender, so can make better judgments on which investments are more solid. And this is essential when you consider the sums that some investors are putting in.
“We don"t cater for retail clients investing £1,000 or £2,000,” says Whelan. “Our co-lenders are high-net-worth individuals, family offices and trust structures. These are sophisticated high-value clients. The minimum they can lend is £100,000, and we have some putting £1 million to £3 million into loans, or spreading £2 million across three or four loans with us. The largest facility we provided was £30 million.”
Do It Yourself
There are already more than 700 crowdfunding platforms out there. Still, for some companies that level of choice isn"t enough. Rather than having to put up with the potentially limiting format of established crowdfunding platforms - or having to stump up the fees they take for using their service - many are looking to launch their own instead.
That"s exactly how Ablrate came about. “We looked at using other platforms, but none could do what we wanted,” says Bradley-Ward, who launched the operation last July. “It"s too niche. In the end we decided to go out and design and build a platform ourselves.”
While this may seem the kind of thing only larger firms could do, the technology is in fact open to anyone. Just a little research online will throw up a proliferation of cheap and easy tools and services to empower fundraisers to bypass the Kickstarters and Indiegogos.
Some enable people to create standalone campaigns on their own websites - meaning no fees, maintaining a common branding and the chance to give the user the exact experience you want to give them. Look at WordPress plugins like IgnitionDeck and Astoundify.
Others empower people and organisations to "be their own Kickstarter", where they can host other people"s crowdfunding campaigns and collect the commissions themselves. These include services like Crowdhoster, Invested.in and Mimoona. GroundBreaker provides custom technology, plus guidance on legal matters, strategy, deal structure, marketing, and business models.
If by now you"re thinking a crowdfunding site would be a good idea if only you could afford it, then you can always try crowdfunding to fund the idea. That"s not even a joke: Seedrs did just that back in 2013, used its own platform to raise money for itself, and raised a cool £1 million in a single day.
When all"s said and done, it looks as if crowdfunding is only going to keep growing in the near future. But like most things in this brave new financial world, it will need to keep adapting to survive - something it seems to be doing quite well for the time being.