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The wisdom of crowds: Crowd funding

Matt Chittock

Matt Chittock finds out whether crowd funding is a passing fad or a fantastic way to fund new businesses

Could 2014 be the year that crowd funding finally catches the imagination of the mainstream business world? 

It’s certainly already caught the eye of George Osborne. In the 2014 budget Osborne announced that peer-to-peer lending (a form of crowd funding where punters cherry-pick new ideas to invest in) could now be included in ISA portfolios. 

This effectively allows investors using websites like RateSetter or Funding Circle to pocket any profits tax-free. This is a big move toward respectability for a funding method once considered innovative but fairly marginal.

At its heart, crowd funding turns traditional investment upside down. So rather than asking one institution for a large amount of funding, would-be entrepreneurs use online platforms to invite hundreds of people to donate, or invest, smaller amounts. 

“Originally crowd funding was used in creative industries as way for artists to get money directly and so retain control over a project,” says Julia Groves, chair of the UK Crowd Funding Association.

For instance, in 1997 the British group Marillion used crowd funding to empower fans to effectively pay for a US tour and a series of albums. And more recently director Spike Lee used crowd funding platform Kickstarter to raise over a million dollars towards his new movie. 

Now Grove says that the banking crisis means the method has appeal reaching way beyond ageing prog rockers and frustrated directors.
“Since the financial crisis of 2008 people have lost faith in banks,” she says.

“Banks now have their hands tied so they can’t, or won’t, lend to small companies. That’s why people have to go to each other for investment.”

“It’s a fairly fundamental social shift – and that’s a good thing. It’s definitely a social way of raising money: unless we do it together, it won’t succeed.”

Grove adds that another benefit of crowd funding is that it’s instant market research before you’ve spent money and effort on launching in earnest.

“You know you’re onto a good idea when you find people are willing to fund a product or service you haven’t even developed yet!” she says. “On the other hand, if it doesn’t attract funding then it’s probably a good time to take a long hard look at what you’re offering.”

Ruth Anslow, one of the co-founders of ethical Brighton supermarket start-up hisBe (short for How It Should Be) says this kind of feedback was essential for shaping the store – which was part-funded through crowd funding platform Buzzbnk.

The hisBe team offered money-off vouchers for people donating to the project, which Anslow says allowed them to gauge interest from potential customers.
“The big advantage is that by crowd funding we created an instant customer base ready to shop in the store the minute our doors opened,” she says. 

“We also liked the idea of being people-powered and democratic – as close to a co-op as possible. So the idea of crowd funding seemed to fit perfectly with that idea.”

It was also a way to fund the store without relying on the banks. Anslow says that after writing their business plan, and realising they needed to raise £200,000 to launch hisBe, they did the rounds of High Street banks – but found the high interest rates attached to loans prohibitive. 

Anslow says that companies looking to follow a similar path should try to create a sense of excitement and a speedy deadline around their projects.

“We thought that three months was long enough to raise the money – but looking back I think we didn’t create enough of a sense of urgency,” she says.

“Next time we’ll have a shorter deadline. It’s like when you sponsor someone for a run, it’s all too easy to think ‘I’ll do that later’. We found most of the money was raised right at the start, and then right at the end when we started a last-minute countdown.”

Despite these tweaks, Anslow has enough faith in the crowd funding technique to be consider it a key way to grow the business. “By June we already want to be talking about another site, and crowd-funding will be a big part of that,” she says.

“It’s about seeing where people would like the shop to be – and we think that if the community want it, then they’ll help pay for it.”


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