How to beat the crowdfunding blues

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How can you put the ‘fun’ back into crowdfunding or, more to the point, the millions of missing micro investors needed to make it work? Recent problems have dampened this fledgling financial marketplace. But small firms needing cash shouldn’t despair.

 

A few years ago, crowdfunding was seen as a ray of hope after the world-wide financial crisis. Why look to the banks — if masses of micro investors are queuing up to help, each waving £10 in your direction? People liked the concept and a number of equity crowdfunding platforms were launched and scaled up.

But then came disillusion

Just recently I attended a CSFI (Centre for the Study of Financial Innovation) roundtable called ‘Fin-Tech for Breakfast’. It touched on several interesting topics such as regulatory developments, payments, digital banking, blockchain and P2P. But then we couldn’t avoid discussing the industry shockwaves emanating from LendingClub.

I won’t cast any judgment or go into the details, aside from saying it’s been reported that sales to a single investor of $22 million in near-prime loans failed to meet that investor’s terms (you can read the full story here). At our roundtable, someone commented that this made LendingClub look more like a non-bank lender rather than a loans marketplace.

This made me think about the broader crowdfunding industry, within which I worked at Code Investing, and which I have had the pleasure to discuss at The Pluralists Club. The question I’m asking myself is: does the ‘crowd’ in ‘crowdfunding’ really exist in this sector today?

What’s changed?

After the initial optimism and excitement, it’s clear that the crowdfunding industry is consolidating and making adjustments:

• The demand for funding is definitely there, but what about the supply? In most cases there are a few large investors (usually angel investors) providing most of the funding.
• Small and medium-sized investors exist but probably not in large enough numbers for these platforms to scale up. And stories like LendingClub won’t help.

• Some platforms are branding and repositioning themselves almost as niche investors’ clubs. We are seeing now the first exits.

With these things in mind, the crowdfunding arena could be shrouded in gloom for some time to come. And in the unpredictable Brexit era, investors of all sizes may be looking for safer, more traditional investments in the short-term at least.

Crowdfunding isn’t gone for good

Even though crowdfunding has taken some knocks, it’s still a valid business model.

As long as interest rates are low and other investment opportunities remain uncertain, then a compelling crowdfunding deal can be just as good (if not better) than anything else you’ll see — and will attract investors of all sizes.

But the bar has been raised.

And that means that any small businesses venturing into the world of crowdfunding need to up their game. Here are three suggestions:

• Stand out from the crowd: Present your core proposition in a bolder way. Find a business expansion expert with a technology/finance background who will help you to cut through crowds of cash-strapped companies.
• Don’t be afraid to re-price and re-package your services: A trusted outside adviser may have a better idea of who you’re competing against – and how to give you an edge, so you can push your way to the front.
• Show you’ve got investors already: Mobilise family, friends and other contacts to raise you up on their shoulders — and boost your crowdfunding chances. Hit the magic 30% funded mark from these people and you might find that’s the tipping point that gives you traction with other investors.

But if that all doesn’t go to plan, then there are other financial backers out there. And you don’t have to go all the way back to the bank. We haven’t gone full circle!

 

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