Start-ups are increasingly using crowdfunding to help grow their business, creating a “major new disruptive trend” in entrepreneurial finance, a Scottish academic study has revealed.
However, new Scottish businesses are trailing behind their counterparts in the south of England, attracting just 4 per cent of the UK total for equity funding.
The work, published by researchers from the University of St Andrews and the University of Stirling, 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 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 £146 million in 2015, up from £91m in 2014.
The study, part of the University of St Andrews’ Working Papers series, 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, financial technology and transport. The firms examined raised on average £408,000, issuing on average 19 per cent equity for the investment to 164 new shareholders.
The research discovered by far the strongest demand for equity crowdfunding is from firms located in London and the south-east of England. In contrast, Scotland attracts around 4 per cent of the UK total for equity crowdfunding, around half the level expected.
Despite the high profile of the Aberdeenshire-based craft beer producer BrewDog, which has raised £7m in three rounds of crowdfunding, Scottish firms seem largely “left behind by the crowd”, the study warned.
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.”
He added: “While start-ups in London and the south-east have eagerly embraced equity crowdfunding, the uptake from Scottish firms seems sluggish. In theory, Scottish firms should be able to access crowdfunding just as easily as firms in London. It’s hard to say the precise reasons for this lack of demand but it may represent a lack of knowledge of this funding source in Scottish SMEs.”
Co-author Dr Suzanne Mawson from the University of Stirling added: “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.
“A lack of interest in this emerging form of finance suggests that Scottish firms may be missing out on important opportunities to help grow their new ventures. There may be scope for policy makers in Scotland, such as Scottish Enterprise, to consider signposting firms towards this important source of growth finance.”