Will the UK get its share of the crowdfunding pie?
The further encroachment of online crowdfunding into the mainstream seems inevitable.
While current market size estimates and growth predictions may be imprecise, there's little doubt that billions of pounds per annum will be funded through crowdfunding in the future. Not only does crowdfunding offer a great opportunity for individuals and businesses that couldn't previously access the funds they needed to grow or make their ideas a reality, it also presents a huge opportunity for those facilitating the process, the crowdfunding platforms.
One of the primary benefits of crowdfunding is its ability to connect people that are very geographically dispersed around a campaign, allowing access to a wider group of potential funders. However while those who fund and are funded via the model will often be widely dispersed across the globe, those that facilitate it need not be. For example, a platform based in the US can easily help launch a campaign in Manchester that attracts funding from all over the world. But why should this matter? As long as the right businesses and projects are getting the funding they need what does it matter where the middlemen are based?
Most platforms tend to charge a not insignificant fee of around 5% of the amount of funding raised to those who are successful in sourcing finance. On top of this, many use payment processing services such as Amazon Flexible Payments that take another few per cent from funders when they contribute their cash. In some cases as much as one in every ten pounds that comes from backers can find its way to intermediaries rather than the project or business being funded. If some growth predictions are to be believed, 5% platform fees could cumulate in hundreds of millions of dollars per annum in the coming years.
Between platform fees and processing charges, about £250K of the £3.4m pledged towards UK projects in Q1 2013 via Kickstarter, crowdfunding's flagship site, never made it to those behind the projects. This may not sound like much but if you consider this was more than the same figure for the entirety of 2012, the growth there is potential for it to become much more significant. But this is not aimed at being anti-Kickstarter. Without them, lots of amazing UK projects may not have come to fruition. The point is rather that, as the money raised through crowdfunding keeps on growing, so does the amount going to the platforms.
The UK's crowdfunding potential
But crowdfunding is much more than just Kickstarter and once a more holistic view is taken the UK is actually pretty well placed. There are a few different types of crowdfunding and there are opportunities for the UK in each. In the rewards model, those that try to directly compete with the US giants like Kickstarter and Indiegogo will likely struggle but there are opportunities for others who are applying the model to specific niches. In the UK we see Peoplefund.it target social projects, Sponsorcraft focus on education and UnBound on publishing. While the potential market size of these niches may be smaller, tailoring a platform for a specific type of project and building a community around an area of common interest can deliver competitive advantages.
The biggest opportunities however may lie away from the rewards model. In 2012, less than £10m was raised in the UK from people pledging money in exchange for rewards. The peer-to-peer lending market (which we include under the crowdfunding umbrella although some others do not) dwarfs this with over £180m lent in 2012. Zopa and Ratesetter in the personal lending space and Funding Circle in the SME lending market have been trailblazing in this area. While there are also strong peer-to-peer providers in the US in particular, UK platforms success to date (and the presence of ambitious funders) puts them in good stead should they eye international expansion.
Equity crowdfunding of unlisted businesses is also an area where the UK is strong. Sites such as Crowdcube, Seedrs and BankToTheFuture have been offering individuals the opportunity to get a small share in exchange for contributing funds. In 2012 over £3m was raised through equity crowdfunding but this has already been well exceeded in 2013. Regulatory inertia in the US has prevented any players there even getting started (never mind expanding globally) and has presented an opportunity to platforms from other countries should they get the regulatory framework right. Some platforms have already indicated an intention to become more international.
The UK's ability to get its share of the crowdfunding pie will be interesting to watch in the coming years as the growth of the model continues and the boundaries of what it can fund are continually tested.
This is the first of a series of blogs on crowdfunding that will be featured here over the coming weeks. Other areas that will be explored include civic crowdfunding, crowdfunding and regulation, skills for crowdfunding and how the model delivers value to participants.