Sources of Finance for Startups - the Crowdfunding Phenomenon

The banks still refuse to lend. Venture capital (by and large) won’t touch startup finance with a bargepole. So should startups look to source the finance they need from complete strangers? The answer for many might now be yes - through crowdfunding.

Crowdfunding is a fast-growing approach to raising finance for business startups. This BBC article and video provides a great example of crowdfunding in action and also some data on the rise of crowdfunding in the UK.

“Crowdfunding” as a concept arrived in the UK a couple of years ago. The concept is pretty simple. Instead of one large investor putting money into a business, larger numbers of smaller investors contribute as little as £10 each to raise the required capital.

The first UK-based crowdfunding website was Crowd Cube (http://www.crowdcube.com/) and this has been followed by several other entrants into the sector.

Of course it is early days for crowdfunding as a source of business finance. Ultimately business investors (however they choose to invest) are looking for a return on their investment. It will be some time before the evidence emerges about the relative success of failure of businesses that are financed through crowdfunding as compared with other sources of finance.

If you’re tempted to dive into crowdfunding as an investor in startups, it will be worth taking a little care. As every business student knows (or should), business startups are high risk - most fail. Startups that turn to crowdfunding may be even higher risk (though they might not!). As with every investment, you have to take some time and care in evaluating the risks and returns.

The Uk regulator in this area (the Financial Services Authority) recently published guidance on crowdfunding investment warning investors that many crowdfunding opportunities are high risk and complex, and are suited to “sophisticated investors” only.

...but it might still be fun putting a few tenners to work…