FRESH from completing one of the most successful rounds in crowdfunding’s relatively short history, Neil Young’s PonoMusic is already moving on to bigger equity markets.
Designed as a bastion against low-quality digital streaming and MP3 files, Pono raked in more than $6.2 million (£3.7m) last month as supporters flocked to the Godfather of Grunge and his campaign to deliver music in hi-def audio.
It was the third-most successful campaign ever on Kickstarter, the New York-headquartered platform that is dedicated to creative projects.
The funds are being used for the initial manufacture of an iPod-style player, plus setting up an online music shop and website. Pono will now spend this month and next tapping up equity investors for additional cash to further expand the business.
The US currently leads the world in the booming market for crowdfunding. It boasts hundreds of platforms and accounts for more than half of the $2.7 billion raised globally in 2012.
Despite this early lead, City fund manager Nicola Horlick believes the UK is well positioned to overtake its transatlantic rival.
She says regulators in Britain have struck a good balance between protecting small investors while, at the same time, giving crowdfunding room to grow.
“It is very important that there should be regulation because we are talking about members of the public, and they should be protected,” she says.
“The UK has adopted the light touch regulation that the industry needs, but things are less clear in the US with the SEC [Securities Exchange Commission].
“I think we will become a world leader, partly because we are very good at financial services.
“In a few years’ time we are going to look back and say this is when the UK became a leader in this area.”
The founder and chief executive of Bramdean Asset Management was speaking after the Spotlight on Crowdfunding event hosted on Friday in Edinburgh by Nesta, the innovation charity originally set up by the UK government in 1998.
In addition to her duties at Bramdean and as chair of Rockpool Investments, Horlick has also set up Money&Co, one of the UK’s newest crowdfunding platforms.
It went live last week, specialising in sourcing lending for small- and medium-sized enterprises.
In Scotland, donation sites such as Bloom have been running for a number of years, helping to raise money for charitable and other worthy causes. This has been followed more recently by the September launch of Squareknot, the country’s first equity and debt platform, and the December launch of ShareIn, the first equity platform to focus on the technology and health sectors.
Amid continuing evidence that start-ups and smaller firms are still struggling to access finance, supporters insist that crowdfunding is here to stay.
“The economy is growing, but if we want it to continue growing we have got to ensure that these smaller companies have access to finance,” Horlick says. “Most of the people you and I know work for small companies, not Shell or BP.”
According to The Crowdfunding Centre, more than 2,600 equity and reward projects were launched in the UK in the first three months of this year, raising some £1,700 per hour for total pledges of more than £5.7m. This doesn’t include peer-to-peer lending – where investors make loans rather than buying equity – which last year raised a further £480m, up 150 per cent on 2012.
Despite this rapid growth, it remains a market in its infancy with much more yet to come. The way for this has been paved by the Financial Conduct Authority (FCA), which earlier this year gave its implicit backing to crowdfunding when it announced new measures for the oversight of online markets.
Buying shares in companies that raise funds on sites such as Squareknot is now restricted to savers advised by professionals, those linked to corporate finance or venture capital firms, or those certified as sophisticated or high net worth investors. All others have to verify that they will spend no more than 10 per cent of their assets – excluding homes and pensions – on crowdfunding in any single year.
Barry James, founder of The Crowdfunding Centre, has questioned whether the so-called 10 per cent rule will hold back funding in the UK. Others such as Horlick, however, describe the move as sensible.
“I wouldn’t want anybody coming on our site and investing all of their money into one high-risk loan,” she said.
“It may be that the potential returns are exciting, but that’s just not a sensible way to invest.
“As long as they spread their risk, I think crowdfunding is appropriate for just about any investor.”
State of play: Scotland’s lagging
SCOTLAND is lagging “a bit behind” in certain crowdfunding models, though it seems that may be about to change.
Liam Collins, policy advisor at innovation foundation Nesta, said discussions at last week’s Spotlight on Crowdfunding event uncovered differing rates of development between Scotland and elsewhere in the UK. What’s more, the amount of lag varies depending on the type of platform being considered.
There are four main types of crowdfunding: those where funders receive rewards such as free product samples; sites where the money handed over is a straightforward donation; sites where funders lend money to a company; and those where investors receive equity in the business.
Donation sites such as Bloom have been running in Scotland for a number of years, but have only been followed quite recently by the launch of Squareknot, the country’s first equity and debt platform.
Collins said concepts such as match funding, where traditional grants are made alongside crowdfunding, have also been slower to take hold north of the Border. However, there are signs of increasing interest in this formula.
“That is one area we will see coming on quite a bit in the coming months in Scotland,” Collins said.