In less than five years, the church of UK crowdfunding has multiplied into an expansive congregation populated at its fringes by offers of varying frivolity.
Individuals ask for money to cover the cost of bills or holidays which they can’t otherwise afford, while campaigns have been launched in support of canine dental treatment and the re-homing of expatriate house cats.
One Londoner tried to raise funds to banish Canadian rockers Nickelback from playing in the capital, and in 2013, a zombie aficionado from Leeds drummed up £319 from folks keen to get their hands on soap products to protect against infection from the walking dead.
This minority of unconventional crusades tends to arise from charity and reward-based platforms such as GoFundMe and Kickstarter, a sect of the crowdfunding convocation that Derek Bond does not adhere to.
However, even in the more central ground of equity crowdfunding – which allows investors to take a direct stake in young companies – Bond believes there is scope for more “sensible” practices.
“In my view there is going to be a lot of bad publicity for the crowdfunding sector in the near future,” says Bond, who set up the first Scottish-based equity platform, Squareknot, in 2013. “I would foresee that by the end of this year and into next year we will start seeing more failures.”
Quite a few have already gone bust. According to figures compiled at the end of last year by AltFi Data and legal firm Nabarro – the first comprehensive study of the UK sector – one in five firms that raised equity between 2011 and 2013 have since closed down.
A slightly higher proportion, 22 per cent, either went on to raise money at a higher valuation or realised a return for investors through a sale or other exit.
Most of the failures have been under the radar, but a few have grabbed some headlines.
Small investors and tech enthusiasts who pledged £139 or more to be among the first owners of “Zano”, a mini-drone for aerial photos and videos, were left out of pocket when its Welsh creators went into voluntary liquidation in November. The Torquing Group raised a total of £2.3m through Kickstarter, which allows firms to give incentives to backers but cannot be used to offer equity or other financial returns.
Crowdcube, a leader in UK equity platforms, suffered a bloody nose in February when claims management specialist Rebus Group went into administration, making it the biggest failure to date of a UK crowdfunded company.
It raised nearly £817,000 in 2015 to fund expansion plans aimed at delivering investor returns of up to ten times within three years.
So far, the failure rates in crowdfunding are not significantly out of line with those across the broader start-up sector. By their nature, not all young firms will go on to succeed.
But Bond has other reservations about the current ecosystem, which has developed an imbalance in the exchange of cash for equity. Having recently merged Squareknot with London-based Growthdeck, Bond and his fellow directors are now pushing to bring a “private equity-style approach” to raising capital online.
“The valuations are very unrealistic,” he says. “As well as people losing money because crowdfunding businesses go bust, you are also going to have situations where follow-on capital is raised from professional investors who demand a valuation reset.
“In those circumstances, even with a successful exit, those original investors may not get all of their money back – in some cases it could be quite a bit less than what they initially put in.”
Research released last week by Growthdeck – which launched at the start of the year with the promise of more transparency and due diligence in crowdfunding – looked at 114 companies raising capital on six different UK platforms during December.
On average, they were giving up just 12.4 per cent of their equity for a typical funding target of more than £311,000, valuing themselves at a median £3.2m.
Prior to joining up with Growthdeck in February, Glasgow-based Squareknot successfully raised £1.1m in nine deals ranging from £50,000 to £200,000 in value. The companies varied from craft beer pub operator MacGregor’s Bars and Darlington FC to video communications app 2mee, all of which were screened by Bond and his assistant to ensure their viability as investment opportunities.
A joint venture between Radius Equity and Lexicon Marketing, Growthdeck launched in January with the aim of providing “professional grade” due diligence and “proper” protection for minority shareholders.
Sensing an affinity between the two, Bond approached Growthdeck founders Gary Robins and James Wrighton about a deal that would expand Squareknot’s access to potential investors. An agreement was struck with an announcement just weeks after Growthdeck’s official launch.
“We were operating in a fairly limited pool of funding here in Scotland, so I had been down in London to find something that could fit alongside our operation,” Bond says. “I heard about the plans for Growthdeck, and asked to meet up.”
Scotland’s highly-developed community of business angels has been a mainstay of funding for start-ups across the country, but it also means that many private investors are already comfortably ensconced within an existing network, making them less likely to pursue crowdfunding opportunities.
In addition to a bigger funding kitty, London’s mass of private investors are also less formally aligned, which opens up numerous opportunities.
“The easy bit is getting deal flow – I’m usually getting a new deal application every day,” Bond says. “The key element is bringing investors to the table.”
A former finance director of John R Weir Mercedes, Bond took his qualifications as a chartered accountant and moved into business consultancy after the motor dealership was sold to Arnold Clark in 2012. He then met up with a father-and-son team, Brian Smillie, senior and junior, who were having trouble raising funding for their retail clothing venture.
Squareknot took shape from there, with Bond and three fellow directors investing a total of about £200,000 in developing the platform and getting approvals from the Financial Conduct Authority (FCA).
Now as head of regional development for Growthdeck, Bond remains based out of Glasgow but has taken responsibility for sourcing new investment opportunities from across the UK.
The objective is quality over quantity, with two new offerings expected to go public later this month and up to 12 in total during year one.
“The growth plans are not that ambitious in terms of volume of deals,” he says.
“What we will be boasting about is that out of the 30 to 40 businesses we will help to fund over the next few years, 90 per cent of them will still be trading.”
Growthdeck’s “sweet spot” will be around the £500,000 mark, a sizeable step up from the funding targets previously typical of Squareknot.
The newly-updated platform is described as employing private equity methodology to crowdfunding, with extensive due diligence carried out beforehand by Growthdeck’s expanded team of eight. Firms will also receive post-investment guidance from a non-executive director appointed by Growthdeck, which is seeking to expand its panel of senior executives from various sectors.
Bond says measures such as these will bring much-needed “professionalism” to a young sector where standards are variable. Latest figures put the value of UK equity crowdfunding at £332m in 2015, up nearly 300 per cent on the previous year, with reward-based funding at £42m and donation crowdfunding valued at £12m.
As online equity continues this rapid growth and further matures, established players will inevitably seek to secure a share of the market. Foreign investors in the form of other crowdfunders are seen as likely predators, as are traditional financial services groups.
“But they will only want to take on a platform that demonstrates the levels of professionalism that we are talking about,” Bond says. “That is one of the benefits of how we are approaching this.”