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The UK Government asks – How do we grow and spread crowdfunding?

Using our framework will help the UK Government grow crowdfunding in line with its industrial strategy.

In January of this year the UK Government published a green paper called  Building our Industrial Strategy with the stated aim to:

  • “build on our strengths and extend excellence into the future;
  • close the gap between the UK’s most productive companies, industries, places and people and the rest; and
  • make the UK one of the most competitive places in the world to start or grow a business.

It is a consultation paper and actively invites responses from all and everyone with an interest it and we have until 17th April to do that.

At 132 pages it has space to set out ambition and is, as you might expect, couched in the narrative that the Government widely uses around inclusivity and fairness and is firmly placed in the context of an imperative and opportunity in the circumstances of the vote to leave the EU. It even has a video with some dubious musical accompaniment but it does at least include some picture of “the dear green place” known widely as Glasgow!

It sets out a structure of ten pillars upon and within which it is intending to frame and build the economy on these pillars being science, research and innovation; skills; infrastructure; business growth and investment; procurement; trade and investment; affordable energy; sectoral policies; driving growth across the whole country; and creating the right institutions to bring together sectors and places.

Within that I was pleased to find mention of crowdfunding and its role in this strategy. In mentioning crowdfunding it tells us that , yet again, the UK Government recognises that crowdfunding is of genuine significance and that they are signaling at the very least some tacit support for it. Falling within the pillar of Supporting Businesses to Start and Grow ( albeit I would argue it is relevant to other pillars too) it introduces crowdfunding in the context of access to equity funding. This is a fundamental error to think of crowdfunding in this somewhat one dimensional way and we will naturally point this out in our response – it is after all a consultation.

The paper reflects that – in their estimation – crowdfunding activity is concentrated in the SE of England and that they have ambitions to expand and spread the adoption of crowdfunding to other parts of the UK and openly invite suggestions as to how this might be achieved.

Whilst the concentration of crowdfunding in the SE of England is a well recognised fact we should reflect on the rapid growth of the funding in Scotland. A rate of growth that outstrips the rest of the UK and as evidenced in the latest Scottish Crowdfunding report.

However their conclusion seems to be that crowdfunding is useful and that we should seek to grow it and they specifically pose the question in the consultation process

“How can we drive the adoption of new funding opportunities like crowdfunding across the country?”

It is a good and relevant question and one that we have been working on with policy makers for a number of years now in a range of different geographies.

In fact is has been such a perennial question we developed a framework in conjunction with Dr Dan Marom to help policymakers develop their approach in an effective and structured way. We call it our Crowdfunding Growth Intervention Model.

Crowdfunding Government Intervention Model

 

The framework has a range of valuable uses. It is an analysis lens providing a structure for auditing and evaluating what is in place in a particular place to support and enhance crowdfunding. It does this by breaking down the key influencing factors into four key groups, which we refer to as Education, Infrastructure, Leverage and Matching so by applying this filter can be a good way of auditing and capturing what is already in place.

The findings of an audit based approach can also be used in benchmarking exercise against other areas. So in this case we could analyze the South East of England, and to compare this to other regions for gap analysis with a view to making adjustments via a range of interventions to close gaps and level up.

The framework also has great application in helping to define the range of ways that a public, civic or governmental body – or indeed policy makers more generally – can act in the form of interventions to build a more conducive environment for crowdfunding to thrive.

Using the framework as analysis tool for all existing support services and provision can be a useful way of ensuring that these can be aligned to, or integrated with, to serve crowdfunding needs. This seems to have particular positive outcomes by ensuring that any crowdfunding initiative sits within and aligned to all broader initiatives and is not a separate and isolated project. Too often we encounter crowdfunding initiatives which are launched with good intention but are isolated and not integrated with a range of other portfolio activities for the body. This can be a highly ineffective and inefficient approach and should be avoided at all costs.

With this range of application and its robust repeatable format we will be recommending that the UK government makes use of it as part of their approach to building on and extending crowdfunding more widely across the UK as part of its industrial strategy.
If you want to learn more about how the framework can be used in your organization to frame your approach to crowdfunding do get in touch.

 

More a Whimper Than a Big Bang?

Reflecting on a slowish start for Equity Crowdfunding in the USA – are there real issues and, if so, what are they?

I engaged in an interesting debate a week or so ago which was responding to an article reflecting on what the author perceived to be a comparatively modest uptake of equity crowdfunding in the USA since its broadest introduction in 2016.

The key numbers for 2016 are (according to Sherwood “Woody” Neiss) 186 campaigns launched of which 79 were successful raising around $18 million.

The numbers are modest but not terrible and after all – size is not everything! That said it is fair to say that, because the gestation period from the fanfare of the JOBS Act to its full enablement was so long, the sense of anticipation was such that many, quite reasonably, expected something a bit more demonstrative.

Given the size of the market and the relative maturity of the reward based crowdfunding models in the USA, and further still the degree to which entrepreneurial activity has been driven by equity finance compared to the Bank led finance of Europe, it was reasonable to expect that it might have had a warmer reception.

The debate on the relative performance was, however, an interesting one and in large part seemed to fall into two philosophical camps. Those that regarded this as a failing born of an unwillingness to adopt more traditional methods of marketing and selling equities and securities and applying them to the nascent equity crowdfunding scene in the USA. The deep irony of lamenting the poor performance of intermediaries to adequately “sell” in a philosophically disintermediated process seemed lost on those advancing this view. The other camp, of which I was one, consisted of those that think that it is this very attitude of treating crowdfunding as being simply an extension of existing traditional finance and an unwillingness to see its distinctive philosophical and practical differences which is mis-setting expectations for participants and causing the growth to lag.

But, in a way, both sides of the argument are probably right and it is just a bit of a case of chicken or egg.

The origins and difficult birth of equity crowdfunding in the USA have, in my opinion, undoubtedly miss set the expectations for participants and stymied growth to the extent that equity crowdfunding in the USA, at a Federal level at least, does look like a timid version of the more unpleasant aspects of old world capital. The SEC’s reluctant and piecemeal introduction of overly complex legislation to make equity sales to retail investors possible delayed the “crowds” participation and allowed existing capital market players to get early site and activity in the process. This, in large part, seemed to set the tone of the interaction. This early misstep was exemplified by a rash of “World Conferences” in the US which presented the depressing sight of minor Wall Street veterans pontificating on a subject they really didn’t understand and simply viewed as an opportunity being presented as “experts” and “thought leaders”. This did not bode well and so it proved. Not least because these old players were able to portray themselves as the “trusted” intermediaries and kingpins as they got first dibs. Unsurprisingly they could present themselves as the “go to” advisers for retail “unsophisticated” investors when they were finally were allowed to become active in the equity crowdfunding sector. So you have a disintermediated process intermediated, and you have old world thinking driving the interaction. Not a good start. IF they are doing a bad job of selling the proposition becomes something of a moot point as the brakes were already on.

Similarly, the restrictions placed on the size of raise $1M in any given year – this is just too low and constrains the applicability of crowdfunding to too narrow a group of participants and suggests it is only of use to micro or new businesses. Secondly the constraints on how to present and pitch to the crowd being bound up in theolf=d world language and terms are both bad and serious impediments to growth for the sector. Here’s why. If you make it difficult for a crowdfund campaign to directly appeal to a wider set of motivations inherently present in a crowd you are constraining the whole essence of crowdfunding. This is an issue in the UK as well but the reticence of pitches to be more emotional and less financially rational is compounded in the USA by the highly litigious nature of society there.

In sum then we have a situation where poorly informed regulators have stymied growth by miss setting the terms, giving an advantage to established capital market players, constraining how appeals can be made, constrain ambition and to all intents and purposes set equity crowdfunding in the USA up as a poor relation of old world capital. Hardly surprising that the market isn’t booming. So if I were reflecting on the challenges faced by the emerging US Equity crowdfunding sector it would not be so much its modest start but the difficulty in distinguishing it from old world capital! If crowdfunding cannot differentiate itself from what has gone before it is truly missing the real opportunity, and so too are the investees missing out on the true benefits.

But let us not be too smug over here. In the UK we had the advantage that our Common Law system allowed equity crowdfunding to get underway under its own steam within existing frameworks. This meant that from the beginning it was a more renegade and counter-cultural approach as it was not driven by existing players but new entrants.  The FCA are, however, trying their best to turn back the clock by introducing similarly daft ill-conceived regulations. They still operate under the illusion that they somehow “made it happen” They didn’t, it happened in spite of them not because of them and they need the humility to learn a bit more about it so as their approach is properly informed.  That way they will avoid compounding their earlier mistakes where they sought to introduce“crowdfunding” specific regulation which fails to differentiate it from other funding in any meaningful way and nw, by their own admission, are facing challenges and risk created by “regulatory arbitrage” and lack of transparency and comparability.

And not all is lost in the US either. The entry of very popular platforms like Indiegogo into the equity arena has to be a good thing. It exposes the idea of equity crowdfunding to a wide range of people familiar with the reward or perk based model and, in so doing, “legitimises” it to the crowd. I wish them every success.

There are even moves to “FIX” the legislation with proposals making their way through the political process – but who knows how that will proceed.

I am also interested in the intrastate crowdfunding which emerged as a result of the delay in the full implementation of the JOBS act. A number of States wanting to push ahead introduced legislation for equity raises within the borders of individual states. The variety of model makes for an interesting laboratory worth reviewing and monitoring for new and novel ideas which might see wider implementation.

So maybe equity crowdfunding’s muted growth in 2016 is a reflection of poor “selling” and marketing by intermediaries. If it is it just shows how bad the US model is and how those charged with implementing it simply don’t get it.

Question is will it change? I have my doubts.

Will Brexit Affect the UK’s Dominance in Alternative Finance?

Following on from the momentous EU Referendum outcome in June of this year many of the dire predictions of imminent and immediate economic meltdown seem to have been somewhat overstated. That is not to say there may not be a bumpy ride ahead but clearly some of the more catastrophic and alarmist predictions seem to have not been much more than a chimera.

I have been very open about the fact that I was an advocate for the Leave Campaign, and as a person regularly contacted by financial journalists for a view on crowdfunding and alternative funding generally I have had the question What does Brexit mean for the alternative finance sector?” posed to me many times both before and after the vote. At a recent major European Crowdeconomy event it was an abiding subject of conversation, all the more so after I publicly declared my position on the Referendum, and the conversations have largely been thoughtful and cordial when I spoke with my colleagues from across the channel but occasionally acid and bitter from UK colleagues.

The reason the question is posed is, in large part, because most analysis suggests that the UK has a very dominant position in the European alternative finance sector. One of the more comprehensive reviews suggest that UK accounts for more than 70% of the European sector by value.

The implicit question when looking ahead is will this dominant position be threatened by Brexit?

I don’t believe it will be significantly so and here is why.

The UK’s dominance in the sector is not a function of its membership of the EU. In fact I would say that it thrives in spite of the EU. The position enjoyed by the UK in this sector is a function of a number of factors most of which will not be affected by Brexit.

One of the reasons that the UK enjoys a leadership position in the crowdfunding sector is because we have embraced all of the forms of crowdfunding, forever. In the main this is a result of our common law heritage as distinct from the civic codes of much of Continental Europe. Here in the UK the principle is that if you can satisfy existing regulations then you can get on with whatever it is you plan to do – hence equity crowdfunding and crowd lending just got on with it under existing regulations. In much of the rest of Europe the legal and regulatory tradition is that one needs to be explicitly permitted to undertake activities in order to do them and in the absence of that permission there is significant caution about proceeding to operate fearing that prosecution may follow. Hence innovation in finance in much of Europe requires additional regulation to be passed before it can take place and the usual can of worms, bun fight, – choose the your prefered metaphor – begins.

This advantage in being able to establish our platforms and explore and innovate in a much more enabling environment has given the UK a significant lead.

But there are other reasons why we thrive in this sector. The UK’s historical tradition as a trading nation has given us an extraordinarily robust and well recognised set of laws to build contracts, start companies and to do business. Our linguistic advantages are well known, our legal and tax systems, for all their faults, are manifestly better and more highly regarded than pretty much any other jurisdictions, and this familiarity, the cannon of case law and trust all play a part in making the UK the place of choice for many to do business.

This can be hugely frustrating to Commission regulators and has caused them to try to challenge or erode that advantage. This was well evidenced by the shameful VATMOSS debacle. Originally presented as a mechanism to challenge the practice of large online retailers from exploiting low VAT jurisdictions to compete against smaller nationally bound retailers it shifted the point of VAT from the retailer’s location to the purchasers location. Clumsily applied and badly thought through it not only singularly failed to address the corporate abuse it intended to challenge it actually had the effect of driving smaller retailers into the big retailers arms to simply avoid the cost of compliance. However a more unspoken aim of the regulation was to specifically implement it in a manner to take aim at the zero VAT registration option for small business enjoyed in the UK, a facility hated by many EU bureaucrats who wish to introduce common TAX rates across the UK be as bad a place for startups as the rest of Europe.

As for the impact of “no access to a single market”, the promise of a single financial market is simply bogus. It doesn’t exist and frankly has practically no chance of existing. The much vaunted “passporting rights” in the EU are undoubtedly relevant to some existing city activities and to the existing old world capital markets but have little or no impact in the crowding and alternative finance space. For example the MIFID permissions should, in theory, provide great opportunity for cross border offerings on crowdfunding platforms. This should be possible now and there are MIFID authorised platforms able to “passport” their offers. But the reality is that because of the huge range of local regulations relating to company formation, and diverse interpretation of “Pan European” directives like the Portfolio Directive, it means that it simply isn’t practical for platforms with MIFID clearance to undertake wide pan national offerings. This is particularly so in crowdfunding as low transactional costs are a key component of the model and complex compliance is just anathema to that.

So, in sum do I think the imminent exit for the EU will affect the UK’s dominance in the alternative finance space? In a word – No.

I am sure that other countries will grow and claim back some share of the market as it matures, but most have a way to go to put in place as good a framework of circumstances that exist in the UK to do that in any aggressive way. Besides the pie is a growing for the foreseeable future so there is plenty to go around. Of course the FCA could make a total hash of the UK’s regulatory position but that is for another day.

So, no I don’t believe Brexit is a significant challenge to the UK’s dominance of the European alternative finance sector and I welcome our opportunity to more readily embrace a global share in an unconstrained way free from the dullards and luddites of the Commission. We can venture in the the true promise of the crowd economy which is open and global and not constrained by the artificial walls of an EU block.

Scotland Racing Ahead in Crowdfunding

Scotland Racing Ahead in Crowdfunding

The Scottish Crowdfunding Report 2016 was published this month and provides a fascinating update on the benchmarks established in the 2013 report and demonstrates Scotland’s rapid advance in UK crowdfunding.

Scottish Crowdfunding Reporttwintangibles was pleased to be commissioned to research and write both of these important reports on the specific and distinctive characteristics of crowdfunding in Scotland.

Significant progress has been made in the past three years from a position where we suggested that the low adoption rates of crowdfunding in Scotland  were perhaps a missed opportunity to a position where Scotland is outstripping the rest of the UK in its growth rates.

The report is focused on the use and impact of crowdfunding on business and has used a consistent approach across the two reports to ensure comparability. Drawing on crowdfunding activity data analysis, survey material and expensive interviews and focus groups the report highlights a number of key feature. Notably it demonstrates a significant the increase in the Scottish share of the value created from crowdfunding in the UK.  Scotland has jumped from a position of less than 1% of the UK total to 4% and this at a time when the UK crowdfunding sector has been growing at a remarkable rate. In the period the data was gathered Scotland raised some £27 million pounds through crowdfunding. The bulk of that, some £20 million, was raised through the Lending model. The dominance of the lending model is not a surprise and is in common with the rest of the UK but it is worth noting that in the Reward space Scotland commands around 7% of the UK totals raised.

Scottish Crowdfunding Report

Through the course of the three years the sector has matured significantly with both the size and nature of campaigns growing along with the range of sectors accessing these funds and the stage in a business life cycle where the funding is being sourced. For example we can see evidence of more mature businesses accessing crowdfunding, no longer is it considered simply for start-ups. A particularly interesting case included in the report highlights an investor exit using a crowd loan to finance the deal.

We suggested back in 2013 that it was not unreasonable to see Scotland’s share of the UK crowdfunding totals to reach around 8%. Some disagreed with this but the evidence seems to suggest that Scotland is getting there and we still stand by that aspiration.

The report was once again supported by the Glasgow Chamber of Commerce along with three new partners for this edition, those being Harper Macleod the law firm that has done so much to champion equity crowdfunding north of the border, LendingCrowd the Edinburgh based innovative crowdlending platform and Santander which as  one of teh major high street banks is demonstrating considerable engagement and openness to the crowdfunding sector, not least through their support of the report.

The full report is available for download free of charge in soft copy for the Glasgow Chamber of Commerce website.

Is the language we use in crowdfunding a problem?

The more we use old world capital market terminology the more we undersell, betray and erode crowdfunding and the more we mis set the expectations of new entrants.

When I hear about things like Lending Club working with Goldman Sachs to “Securitise” $150m worth of loans I begin to worry. When I hear of more and more institutional money flowing onto crowdfunding platforms I worry. When I see old world capital participants cynically creating “crowdfunding” platforms which are not crowdfunding at all I worry.

But in many ways I worry more when we casually and thoughtlessly fall into the use of old world capital terminology speaking of “investors”, “dragons” “yield”, “ROI” “exits” “valuations” “multiples” and all the rest to describe crowdfunding activity and participants.

And here is why.

Crowdfunding is different. Or at least it was. Crowdfunding was not just an extension of the existing capital markets and it was not invented to meet a gap in the existing market at a period of capital constraint post the 2007 crash. Crowdfunding, by virtue of its philosophical and practical traditions, emerged as a new and different model. A different model with new motivations and new participants, and new terms of engagement. Sure it provides money but it provides better money, money with more benefits, genius money as we choose to call it. It is genius because it comes under different terms and different expectations. The relationship and the contract is a different one. And on top of that it brings piles and piles of additional value. So crowdfunding has no need to look, describe itself or behave like old world capital. The more that it does the more it loses its soul and that is worse for all participants.

The language and preoccupations of old world capital have no place in crowdfunding.

To introduce them simply misleads the backers and supporters and mis sets their expectations and what to expect and why to engage and its storing up problems for the future. But perhaps more importantly by changing the nature of that relationship between backers and who they back, those getting the support are increasingly cheated out of all the benefits of having these different backers support them. They end up not getting the genius money just dumb old old world money.

This is one of my biggest bug bears with the FCA. They treat Crowdfunding as nothing other than a traditional “investment” and as such they create a culture, an expectation around the transaction which is inappropriate and, in so doing and as I have argued elsewhere, introduce greater risk to the sector rather than mitigating it. It is probably more “cock up” than conspiracy in the FCA’s case. With their “usual suspects” background they probably don’t know any better, but then again you rather get the impression that they don’t want to learn either.

Many platforms are also complicit in this as well. In part because, in the arms war to grow and secure their position (and often to pay back the old world capital backing them!), they have to conform to the requirements of the regulator and partly because they think this is how to attract in the “investors” and the institutional money they crave.

This will create a problem down the line for platforms as the financial and economic circumstances change and they find themselves competing with other traditional investments in a typical old style marketplace and find they have little to offer to differentiate themselves. So maybe short term gain may lead to long term pain.

It is noticeable that some of the major Reward platforms seem to be able to keep their conscience and souls somewhat more effectively. Kickstarter moved to becoming a Public Benefit Company and the words of founder Yancey Strickler still give cause for optimism. The recent interview with Danae Ringelmann of Indiegogo also holds out much hope of a new and better model will be sustained in the crowd economy.

But it seems that anything the wretched bankrupt sphere of old world capital touches corrupts – in that King Midas way that ultimately comes unstuck.

I found it fascinating speaking to a multiple successful crowdfunder recently who spoke of how he had experimented with Facebook Ads for a recent campaign and how he was abandoning them. For him straight ads created a different relationship. This was simply retail, ecommerce. The contacts coming through this route were just “purchasers” they were not in the for the journey. It is not for nothing that many platforms reinforce that they are not shops, and by the same token they are not banks or VCs either!

This is not a mere semantics exercise either. It cuts to the heart of what makes crowdfunding so different and so much part of a new crowdeconmy model which offers a new and better vision of how to do things.

So we must not be seduced by the siren calls of those that would simply see crowdfunding as an extension of what has gone before. We must guard against this by our use of language which can be very powerful, and I am as guilty of using loose terminology as anyone else. You, I and others needs to pay attention to this, it should mark us out as the uncorrupted.

So if your lending platform of choice begins to issue press releases about they “securitize” their loan book, or refer to you as an “arm chair dragon” I suggest that it is time to leave and take, or seek, your genius money elsewhere.

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