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Low take-up among Scottish firms

Crowdfunding ‘crowding out’ other sources of finance

Brewdog dreamEquity crowdfunding platforms are increasingly “crowding out” other source of finance, including banks, venture capitalists and business angels, according to new research, although take-up among Scottish firms is far lower than in the south of England.

The rapid growth of new internet-based crowdfunding platforms, like Crowdcube, Seedrs and the Syndicate Room has seen an increasing number of start-ups turn to equity crowdfunding to finance their growth.

Research by the University of St Andrews and the University of Stirling, published as part of the University of St Andrews’ Working Papers series, shows the UK has quickly established itself as the fastest growing equity crowdfunding market in the world.

Companies have raised £146m in 2015, up front £91m in 2014.  The researchers says: “This could just be the beginning of a major new disruptive trend in entrepreneurial finance.”

The study interviewed 42 British firms who had received crowdfunding and found that they are primarily attracted to the speed with which funding can be raised – often a matter of 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, fin-tech and transport.  The firms examined raised on average £408,000, issuing on average 19% equity for the investment to 164 new shareholders.

The research discovered by far the strongest demand for equity crowdfunding is from firms located in London and the south-east.  In contrast, Scotland has been slow to take up the crowdfunding option, attracting just 4% of the UK total for equity crowdfunding, around half the level expected.

Despite the high profile of the Fraserburgh-based craft beer firm, Brewdog (pictured), which has raised £7m in three rounds of crowdfunding, Scottish firms seem largely “left behind by the crowd”, say the researchers. What they did not say was the BrewDog has resorted to traditional forms of fund raising after failing to raise the £25m it hoped achieve from crowdfunding.

The research discovered a number of other important benefits from crowdfunding.  Entrepreneurs sought “validation” of their business concept and business model by the crowd.

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

Dr Ross Brown from the Centre for Responsible Banking & Finance at the University of St Andrews, said: “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.”

Co-author Dr Suzanne Mawson from the University of Stirling added: “By connecting start-ups to new investors, new customers, new markets and new media channels, equity crowdfunding is now a vital mechanism for accelerating the growth of innovative new companies.”

Remarking on the low levels of interest shown by Scottish firms, Dr Brown added: “While start-ups in London and the south-east have eagerly embraced equity crowdfunding, the uptake from Scottish firms seems sluggish.

“In theory, Scottish firms should be able to access crowdfunding just as easily as firms in London.  It’s hard to say the precise reasons for this lack of demand but it may represent a lack of knowledge of this funding source in Scottish SMEs.”

Dr Mawson further added: “A lack of interest in this emerging form of finance suggests that Scottish firms may be missing out on important opportunities to help grow their new ventures.  There may be scope for policy makers in Scotland, such as Scottish Enterprise, to consider signposting firms towards this important source of growth finance.”

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