Alternative fund sources crowding out traditional lenders but Scots slow on the uptake

A team of Scottish academics have revealed that increasing numbers of new firms are turning their backs on traditional methods of financing like banks and business angels in favour of internet crowdfunding.

The results of a study carried out by experts at St Andrews and Stirling universities found that banks, venture capitalists and business angels are being “crowded out’” by equity crowdfunding platforms like Crowdcube, Seedrs and the Syndicate Room to get their businesses off the ground.

The researchers revealed that as a result, the UK has quickly become the world’s fastest growing equity crowdfunding market.

Companies have raised £146 million in 2015 and £91m in 2014, which could just be the beginning of a major new trend in entrepreneurial finance.

However, Scotland attracted only about 4 per cent of the UK total for equity crowdfunding, around half the level expected and despite success stories like Aberdeen-based craft beer firm Brewdog which has raised £7m in three crowdfunding rounds.

Ross Brown from the Centre for Responsible Banking & Finance at the University of St Andrews said the lack of crowdfunding uptake in Scotland may be due to SMES lacking awareness.

Co-author Suzanne Mawson from the University of Stirling added that Scottish firms “may be missing out on important opportunities to help grow their new ventures”.

She said: “There may be scope for policy makers in Scotland, such as Scottish Enterprise, to consider signposting firms towards this important source of growth finance.”

The researchers interviewed 42 British firms who had received crowdfunding and found that they were primarily attracted to the speed of fundraising – often just 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 around 19 per cent equity for the investment to 164 new shareholders and, in terms of the demand, there seems a clear north-south divide, with by far the strongest demand coming from firms in London and the south-east.

The research discovered a number of other important benefits in which entrepreneurs sought “validation” of their business concept and model by the crowd.

They also benefited enormously from media exposure via their campaigns and engagement with potential investors. Thus the real benefit of crowdfunding is “more than just money”.

Dr Brown from St Andrews University, added: “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.”

Dr Brown concluded that while crowdfunding was good for start-ups, the explosive growth of it raises thorny issues in terms of investor returns.