CHEAPNESS and more client loyalty among benefits of crowdfunding, writes Perry Gourlay
While many of the businesses which looked to raise money through crowdfunding in the early days would no doubt fail a grilling in the Dragons’ Den, the latest Scottish companies to announce offers have highlighted the changing face of the sector.
Last week, Bertram Nursery Group – the UK’s eighth largest chain with more than 3,000 childcare places – launched plans to raise £3 million by issuing mini-bonds.
Unlike many of the hundreds of businesses looking to raise money on the crowdfunding platforms, Bertram has already secured significant backing from traditional funding sources. It has turned to crowdfunding to add to the financial firepower at its disposal through £3.5m in debt finance secured via private equity firm Rockpool Investments following an offer to its high net worth investors last year.
Bertram’s mini-bonds, initially offered to parents and grandparents of children attending its nurseries, are a similar model to the one being used by Innis & Gunn as it seeks to raise £3m to build its own brewery.
According to Paula Skinner of law firm Harper Macleod, who has worked on a number of Scottish crowdfunding deals, the bond issues by the two firms are evidence that crowdfunding is increasingly being seen as an option by a wider range of businesses.
“These are larger, more established companies and the kind of firms that are able to access traditional bank debt but have opted for crowdfunding,” said Skinner.
Although it is generally a cheaper way for firms to access finance, there is also a potential marketing benefit from crowdfunding with opportunities to look to tie in long-term customer loyalty and raise brand awareness.
In the case of Innis & Gunn and Bertram, investors are being offered discounts off beer and childcare on top of returns which are attractive in the current low interest environment, although the investments are not covered by the Financial Services Compensation scheme.
For investors, bonds are easier to understand than equity issues as there is a fixed rate of interest on offer, provided things go to plan.
Crowdlending, where investors lend money to businesses and get a regular return rather than taking an equity stake, also continues to grow in popularity.
Since Edinburgh-based LendingCrowd launched in September 2014, it has facilitated more than £1.2m of loans to 22 companies across its platform and has more than 750 people signed up as investors.
But for many companies, particularly early-stage businesses who may not be able or want the pressure of having to meet regular repayments on money raised, selling a stake in the business to the crowd remains an increasingly well-trodden path.
Although Stuart Dinning, founder of Edinburgh-based takeaway draught beer business Growler, admitted raising money via crowdfunding had proved harder than expected, he believes the long-term business benefits will be valuable.
“We now have 118 investors who are ambassadors for our brand, which is very positive for us as we look to expand the business to a much wider audience,” he pointed out.
Growler raised more than £100,000 through the Crowdcube platform to finance its expansion plans, although Dinning admits it had been “touch and go” whether it would reach its target. “We were some way off with three days to go before the deadline but then a big investor came in.”
To secure the investment Dinning had to agree to giving up more of the equity in the business – 20 per cent rather than 15 per cent – than he originally planned. But with the money banked and an offer already in for a second shop, he is happy with the outcome.
While crowdfunding is forecast to continue to see strong growth in the years ahead, recent research from financial ratings specialist Company Watch, which examined the financial strength of some businesses that have tapped into crowdfunding over the past three years, has also highlighted the potential risks faced by private investors.
Ewan Mitchell at Company Watch, said: “Just as in private equity or venture capital funded enterprises, crowdfunding produces some clear winners and many others that don’t perform nearly as well as either the company or external investors had hoped.”
Skinner also stressed crowdfunding wasn’t suitable for every business, but believes as crowdfunding continues to gain traction, a growing number of established businesses will look to it as an option to meet at least part of their funding requirements and that niche platforms will start to emerge in particular sectors, such as life sciences and food and drink.
“I also think we will see more of the angel syndicates and public sector funders working alongside crowdfunding. Public sector support combined with the ‘grey hair’ and experience of the Angels and the marketing power of the crowd offers a really exciting mix.”
Bond boost: Firms who have benefited
Scottish businesses who have raised money or launched offers through crowdfunding include:
BrewDog: the Aberdeenshire brewer has completed several successful fundraising rounds through its Equity for Punks scheme and is now looking to raise £25m via crowdfunding.
Flavourly: the craft beer and gourmet food service raised £515,000 after the business turned down £75,000 of investment on BBC’s Dragons’ Den.
SuperJam: the award-winning producer of fruit jams founded by Fraser Doherty (inset) raised more than £300,000 in an oversubscribed offer.
FreeAgent: which provides cloud-based services to micro-businesses and freelancers recently launched a £1 million crowdfunding campaign to support product development.
Tag Games: the developer of mobile, tablet and handheld video games, raised £150,000 of capital for new product development through LendingCrowd.