British start-ups are increasingly using equity crowdfunding to help grow their businesses, rather than conventional sources of funding, according to a study published today by researchers from the University of St Andrews and the University of Stirling.
The work, published as part of the University of St Andrews’ Working Papers series, shows that banks, venture capitalists and business angels are increasingly being ‘crowded out’ by equity crowdfunding platforms.
Owing to the rapid growth of new internet-based crowdfunding platforms, like Crowdcube, Seedrs and the Syndicate Room, an increasing number of UK start-ups are turning to equity crowdfunding to finance their growth. As a result, the UK has quickly established itself as the fastest growing equity crowdfunding market in the world. Companies have raised £146m in 2015, up front £91m in 2014. This could just be the beginning of a major new disruptive trend in entrepreneurial finance.
The study interviewed 42 British firms who had received crowdfunding and found that they are primarily attracted to the speed with which funding can be raised – often a matter of weeks – and the lack of “strings attached”. The types of firms seeking this “fast money” were very young, small and often pre-revenue, with the majority operating in consumer-oriented sectors such as digital media, food and drink, fin-tech and transport. The firms examined raised on average £408k, issuing on average 19 per cent equity for the investment to 164 new shareholders.
In terms of the demand for equity crowdfunding there seems a clear north-south divide in the UK. The research discovered by far the strongest demand for equity crowdfunding is from firms’ located in London and the south-east. Despite the high profile of the Aberdeen-based craft beer firm, Brewdog, who have raised £7m in three rounds of crowdfunding, Scottish firms seem largely “left behind by the crowd”.
The research discovered a number of other important benefits from crowdfunding. Entrepreneurs sought “validation” of their business concept and business model by the crowd. They also benefited enormously from the media exposure they received from crowdfunding process via their campaigns and engagement with (potential) investors. Thus the real benefit of crowdfunding are “more than just money”.
Dr Ross Brown from the Centre for Responsible Banking & Finance at the University of St Andrews, said: “For the most part, start-ups no longer see banks as an appropriate source of funding and are increasingly viewed as archaic given the dynamic nature of the modern day start-up economy. By contrast equity crowdfunding is viewed as ‘fast money’ which helps new ventures to grow rapidly.
“The average size of funding raised surprised us and suggests that crowdfunding is not just a source of start-up funding but also growth finance to enable start-ups to upscale. While some organisations have labelled crowdfunding ‘alternative’ finance, our work suggests that ‘disruptive’ finance would be a more appropriate term.”
Co-author Dr Suzanne Mawson from the University of Stirling added: “As equity crowdfunding becomes more and more mainstream, we need to understand the impact that this type of funding has on firm development and growth over the longer-term. We know that equity crowdfunding can help to create jobs and to secure assets in the short term, but the real outcomes and benefits of this process will take time to determine.”
Dr Mawson continued: “By connecting start-ups to new investors, new customers, new markets and new media channels, equity crowdfunding is now a vital mechanism for accelerating the growth of innovative new companies.”
Looking to the future, Dr Brown concluded:
“While undoubtedly good for start-ups the explosive growth of equity crowdfunding does raise thorny issues in terms of investor returns, especially given the valuations placed on some very nascent firms. Very few of the start-ups funded have given investors returns owing to the lack of ‘exits’ such as IPOs”.
Notes to news editors
A copy of the full paper is available here: http://www.st-andrews.ac.uk/business/rbf/workingpapers/RBF15_009.pdf
Dr Ross Brown is available for interview on tel: 01334 462 202 or mobile: 07947 190 175
Dr Suzanne Mawson is available for interview on: 01786 466 453.
Issued by the University of St Andrews Press Office.
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