Yesterday Webworks attended the first Crowd Finders event in the Siemens Crystal building. A conference on the new phenomena of crowdfunding (George Osbourne is a fan) attended by the likes of the major players such as Crowdcube, Seedrs and Nicola Horlick’s Money & Co.

Crowdfunding has been a number of years in the making but the UK are leading the way by regulating this market with the political will of the government.

So what is crowdfunding?

Crowdfunding is peer-to-peer (read person to person) gifting, lending or investment. It is a way of removing the banks and institutional players who have sometimes been unable or unwilling to lend to businesses of all sizes based on some criteria test they have.

Crowdfunding takes place online where companies such as the players below act as matchmakers joining up people who need finance to grow their businesses to those who want to either invest in businesses for the bragging rights of supporting the next Facebook or to make better returns than available in savings accounts and ISAs.

Crowdfunding comes in three different flavours and are categorised by the types of return that is offered to the person putting the money in

Reward Crowdfunding

Is a rather altruistic form of matchmaking where the company seeking finance offers various rewards to those donating the money. The key here is that the company does not offer shares or an obligation to pay interest to those who provide the finance, just products or discounts. Those that donate receive the rewards as and when the company completes its goals if at all. The major platforms that offer reward based Crowdfunding are the likes of Kickstarter and Indiegogo. Many of the companies that are pitching on these platforms are manufacturing goods and have the idea, a prototype and a team and want to develop their product to manufacturing ready with the help of the investment. The reward is the ability to obtain the product once ready for a discount or a gift. One of the famous examples of a successful Kickstarter project is the Pebble watch, the predecessor of the Apple watch and one of the founders of the development into wearable tech.

Equity Crowdfunding

This is a bit more vanilla flavoured. The platform (such as Seedrs, Crowdcube and the Syndicate Room) is a shop window where companies can put their pitch and wait for investors to respond. Some platforms want a lead investor such as an experienced angel to set the valuation by acquiring shares and some start you from scratch. Here the company being financed issues the shares via the platform and can keep in contact with investors on successes and failures.

Debt Crowdfunding

Companies that do not fit into their banks risk criteria can these days look elsewhere with confidence. Many of the new companies offering debt Crowdfunding (Lending Circle and Zopa to name two) are friendly to service companies who survive and thrive because they hammer their assets and prefer not to tie up capital in land and equipment. This lack of security or asset cover is a common issue with getting refused which is why peer-to-peer business lending reached £193 million in 2013.

The mechanism to receive the money is broadly similar for all forms of crowdfunding. The platform takes between 7% and 10% and holds all the money in escrow until the finance target is met and then releases the funds. If the target is not met then the money is returned to the lenders/investors.

There are no upfront costs to the companies that a looking for the finance (and a community to evangelise about their products and services) but that does not mean that this is financing on the cheap. There is an investment needed in crafting the pitch, putting together a great video and spending time talking to potential investors and their network to give the proposal momentum.

If as a business in need of financing you feel crowdfunding is a potential option feel free to call Webworks for more information.