Crowdfunding is kick-starting business – but will regulation kill the golden goose?
Entrepreneur William Berry fears one-size-fits-all regulation could hold back business growth
Good ideas are plentiful in life but unfortunately, much of the time, capital is in short supply which means many of those good ideas never make it on to paper, let alone a factory floor.
Often all that has stood between an idea and reality has been an unimpressed bank manager who doesn’t see the potential in what you have to offer but the world has moved on. In the spirit of social media and creating your own hype, crowdfunding has become an ever more popular route for start-ups and growing companies.
Crowdfunding is a unique way to raise finance; you put your idea online through a crowdfunding platform with the aim of raising a specific amount and those who see the potential in it can take a punt on your business and put in some capital.
This collective pooling of resources is great for a number of reasons as it means you can retain control of your business although you may be offering an equity stake in the business for those who invest.
While raising cash is the obvious aim of crowdfunding it is not the only benefit. By putting your ideas out there and having investors to answer to your business plan is put into sharp relief and any goals you set, you become accountable for.
With social media at the heart of crowdfunding, it is a great way to create a buzz about your company, with crowdfunders spreading news of your idea – it’s a ready-made marketing machine. Not to mention the customer base you will automatically have through your investors and their extended connections.
For many small businesses, crowdfunding can act as a finance, marketing and advertising department all in one.
Crowdfunding is big business, with $1.5bn raised in 2011 but be warned, this ‘democratic finance’ may seem like a dream come true for the budding entrepreneur but in the UK it has recently come under scrutiny from the financial regulator.
The Financial Conduct Authority (FCA) takes over the regulation from the Office of Fair Trading next April and even though it’s not in charge of crowdfunding just yet it has already expressed worries about the lack of information given to potential investors.
While the social media element of crowdfunding is what draws many people in, the FCA is concerned that ‘young, inexperienced investors may be attracted to the concept without a full understanding of the risks’.
Who will invest?
The regulator wants to make sure only wealthy, savvy individuals who know what they’re getting into invest via crowdfunding – or get people to declare they are only investing a maximum of 10% of their savings in a venture.
The effect on business start-ups and companies looking to grow is yet to be seen. And while the regulator believes making crowdfunding better regulated and safer means more potential investors will be attracted to it there is concern that the FCA is trying to fit round pegs in square holes with its one-size-fits-all regulation. After all no two businesses are the same.
We must hope that the definition of who can invest via crowdfunding doesn’t restrict money going to new businesses by making the rules too onerous or, just as importantly, restrict creativity in the way that businesses fund themselves at the beginning of their lives.
It’s difficult in an increasingly competitive world to make your idea come to life and for you to convince a large institution that a small business is worth investing in, crowdfunding cuts out the need for reliance on the big boys and lets you get straight to the people who matter – your potential customers.
William Berry is a serial entrepreneur and in 2006 was named a Young Gun by Growing Business. He is the founder-director of accommodationforstudents.com, and Vincentbond.com. William is also CEO of the new video start up p6.com, based in California.