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Lots of Breweries are Crowdfunding

Back in 2011 we published a report for the MSKE Conference in Portugal called Getting Something Brewing. It was based on research we had undertaken on the craft brewing sector in Scotland which focused on the possibilities for these small businesses to create value from the use of social and collaborative technology.

Our main point was that this was a sector that is highly tribal, and increasingly digital and that, by developing a crowd based asset, these companies could improve both on operational efficiencies, drive sales and marketing and create something that could generate significant value for them as opportunities progressively arose in the social era.

One area in particular we highlighted was the role of social assets to create the potential for crowdfunding to become a funding stream for smaller brewers.

Our conclusions were that – at that time – very few of the many participants in the sector were doing a good job of it and that, as such, it was something of a missed opportunity.

Of course Brewdog continue to demonstrate the art of the possible and as they close in on the £4 million target of their third and most recent equity crowdfunding round it caused me to reflect on other recent crowdfunding success stories in the brewing sector.

In the UK it’s fair to say that Crowdcube are the platform with much of the success. One of the more recently completed funding rounds, in May of this year, was Quantock Brewery. This is a relatively small 8 barrel family run brewery who aimed to trade 40% of their equity for £100,000. As it turns out the demand led to their eventually choosing to trade some 48% of equity in return for £120,000 from 130 investors. The equity on sale was A Share only. Also they were EIS eligible – which is pretty much the case for all equity crowdfunding rounds at present.

Even more recently – in fact in this month – the Hop Stuff Brewery, a startup looking for funding to build a 10 barrel plant, managed to raise £58,000 from the sale of 35% equity consisting of both A and B shares from 70 backers.

To complete the set, just over a year ago the Brupond Brewery – again a start up and this time a quirky vegan brewery with crowdsourcing in its DNA – raised £35,000 of for 25% of their A share equity. This tiny set up were SEIS eligible as well.

If we look a bit further afield we come across Cerveza Guayacan brewery in northern Chile which raised some $135,000 on the Broota equity platform (a curiously apposite platform name for a brewery funding round). This came from 48 investors and an average investment of $2,600

Reward based success stories are harder to find, not least because most platforms prevent beer, or any alcohol for that matter, being offered as a reward. But, the more creative can succeed too and the Grapevine Brewery in Texas managed to generate $61,923 from 201 backers for their startup brewery. Their project ran on the US based platform Fundable, and consisted of 9 reward categories, of which the $250 value reward was the most popular. One factor that may well have contributed to their success is a commitment to sink 5% of their quarterly profits back into the local community which would undoubtedly have harnessed the power of Locavesting, as Amy Cortese would have it.

To meet this growing demand we are also beginning to see specialist platforms emerge that deal specifically with this sector. For example there is Crowdbrewed in the US that is waiting with baited breath for the final enabling of the JOBS act to branch into equity.

A brewery’s crowd based assets have many ways to create value but it is apparent that crowdfunding is increasingly one of them – as we predicted.

Equity-based crowdfunding is now legal in Italy

Equity-based crowdfunding is now legal in Italy

Yesterday, the Italian Financial Authority has formally announced the legislation on equity based crowdfunding and tomorrow the Regulation will be published on the Gazzetta Ufficiale. After the 15-day vacatio legis (period between the promulgation of a law and the time the law takes legal effect), equity-based crowdfunding will be legal in Italy, which becomes the first country in Europe to implement equity-crowdfunding laws.

The imminent publication of the regulation on crowdfunding by CONSOB, the Italian Financial Authority, introduced by the Legislative Decree n. 179 (Growth Decree) in December last year – was officially announced by Dr. D’Agostino, vice-director of CONSOB, at an event organized by Mission Community held in Milan yesterday.

Dr. D’Agostino began his presentation with a review of the circumstances  that have led to the development of equity crowdfunding as a means of alternative finance in Italy. He explained that the Bank of Italy says that the country is in a time of contraction of bank financing, especially for small enterprises, which have enormous difficulty in accessing capital markets; furthermore, that private equity has never taken off in Italy.

This represented a challenge when Consob was tasked to regulate a very new phenomenon, in a non-harmonized European regulatory framework, where there is no benchmark to refer to. He pointed out that in other countries, equity crowdfunding is “regulated” through exemptions from traditional legislation, and there are no established and consolidated regulations dealing specifically with crowdfunding. Consob, therefore, adopted a very open approach, as the most appropriate means of developing highly participatory and “crowdsourced” legislation with clarity in a new and complex matter. D’Agostino believes that the transparent nature of the regulatory instrument is also apparent from the fact that an “ad hoc” regulation was preferred to regulations scattered all over the legislation. This means that a single document is available for consultation, greatly facilitating the understanding of regulatory constraints.

Consob opened the collection of ideas and analysis to all stakeholders through a survey that  received “a huge number of contributions”, and which was followed – in February – by an open hearing that was intended to capture the essential aspects of the regulation in order to get to a first draft. This was then  placed once again in public consultation during March/April from which it received further contributions from the public.

Last Wednesday, the first part of this process has come to an end and tomorrow the Regulation will be published on the Gazzetta Ufficiale. After the 15-day vacatio legis period, the Regulation will take legal effect, but new portal operators can already  apply to be included in the register.

Dr. D’Agostino revealed some of the details contained in the regulation, notably the constraints under which it will permit this type of crowdfunding. Equity crowdfunding will only be for risk capital and not debt capital, this includes equities and shares issues from Limited Companies. Perhaps the most significant constraint is that equity crowdfunding is only permitted for “innovative startups”, as defined in the decree (you can read more on this in our previous post about equity crowdfunding in Italy http://twintangibles.co.uk/italian-equity-crowdfunding-regulation-what-you-need-to-know/)

The purposes of the regulation is to facilitate the financing of companies with a very high risk profile and high-tech orientation. It is also intended to regulate the online platforms operators with the aim to reduce operational and legal risk, as well as the risk of litigation and fraud.

The legislators who introduced the initial decree that has led to the development of the regulation wanted specific provisions to bring a level of discipline to the running of the platforms. In addressing this the CONSOB has included a mechanism for the creation of an “ad hoc” register of operators to provide traceability and transparency.

Consequently wanna-be portal managers have to apply to be included in the register, whereas banks and financial intermediaries will “by right” be permitted manage their crowdfunding portal without prior registration. However they have an obligation to inform Consob when they start and they will then be included in a special section of the above mentioned register.

In terms of the professional requirements for operators, considerable flexibility has been introduced permitting non-executive directors of the platform to come from backgrounds other than financial ones. The  CEO, however, must have experience in the financial sector. Consob has also introduced the so-called “interlocking” ban, so as to avoid situations in which certain personalities who meet the right professional criteria are in the Board of more than one portal, simply to fulfill legal requirements.

Dr. D’Agostino emphasised that the regulations try to reduce the administrative burden in the process in order to encourage growth in the sector. That said a number of “information obligations” on operators are included in particular with regard to requirements to inform investors. The information obligation specifically addresses share offers and reaffirms the need to carry out suitability tests on investors, and that before making any investment the investors must complete a questionnaire that verifies that they are aware of the high risk involved in their investments. The obligation to provide information to the customer on the amount of money invested has also been introduced.

There are also efforts to simplify the investment process for smaller investors through the elimination of some requirements for investments of less than 500 Euro/offer (1000/year) (exemption from MiFID).

One important point to note is that it is absolutely forbidden for crowdfunding portal operators to give any investment advice but portals must make an effort to make information about offers as clear and complete as possible.

One of the most debated points of the proposed Regulation during the consultation process was the requirement for professional investors to subscribe  to at least a 5% of the shares in any offer. This was hotly debated and the compromise seems to be that this requirement now must be met in order to complete the process but is not necessary as a pre condition and prior to an offer being made. As it happens incubators of innovative start-ups are included in the professional investors category, so this offers a mechanism to those entrepreneurial champions to easily participate as equity based investors.

Italy can be proud of the fact that it is the only country in the EU with a legislation on equity crowdfunding even if it is limited to innovative startups. This places a responsibility not only on Consob, which will have the important task to supervise and monitor the market so that everything can develop in a fair and transparent way, but also on the entire sector.

Dr D’Agostino, emphasised the emerging nature of this sector  and the innovation at the heart of this regulation. He made the point that, in such circumstances, it is impossible to be certain that this type of regulation is robust, and that failures are in the nature of these initiatives. Consequently it is the  responsibility of all to challenge opportunistic and questionable behaviours. But, above all, he believes, that it is right to explore this form of alternative financing, and that open debate in such a young and emerging sector is a good thing. All Italian crowdfunding lacks at present is a critical mass and it is hoped that the regulation can act as a catalyst for growth and make this development a reality and not just an ambition.

Crowdfunding – The Scottish Perspective

This morning a report, commissioned by the Glasgow Chamber of Commerce, was released at a breakfast event in Society M in Glasgow. Called “Crowdfunding – The Scottish Perspective” the report was produced by twintangibles and sets out the findings of a comprehensive review of the Scottish business communities awareness of, and attitude to, crowdfunding and how well it might fit the finance shortfall that persists post the financial and economic crisis of 2008

Amongst its key findings is that there is an ongoing need for finance particularly in the SME sector. This will come a no surprise to even a casual observer of the UK wide business environment. But what is much more interesting is that the size of funding typically sought, and the purpose to which it will be put, both fit well with crowdfunding.

Firms in the survey sought a range of sums which averaged at c.£50,000 and in many cases the funds were sought for innovation and new product or service development. Crowdfunding in its many forms is well able to provide this  sort of sum for a well managed project, and the crowdvalidation element of a crowdfunding project can bring considerable benefit to those developing innovative and new products or service.

However, it is also apparent that Scotland is significantly under utilising the opportunity presented by crowdfunding, and there is no simple answer as to why this is.

It does seem that the awareness and deeper understanding of the potential for crowdfunding needs to be more widely embedded in the business community to build the confidence to turn an interest in crowdfunding into active engagement.

We believe the commissioning of the report and its release today was a far sighted act by the Glasgow Chamber of Commerce and we hope that it marks the beginning of a process that we hope will lead to Scotland taking up a greater share of the crowdfunding opportunity available.

You can find much more detail and food for thought in the complete survey and, best of all, its free!

You can download and read the report here

You can hear what Tim had to say about the report on BBC Good Morning Scotland


Homepage slider image courtesy of Marcus / FreeDigitalPhotos.net

Crowdfunding and Social Networks

Crowdfunding and Social Networks

Last week we were invited in Brussels to give a presentation at a major  event organised by the European Commission, DG Internal Market and Services to explore issues, potential and risks related to crowdfunding. The event, Crowdfunding – Untapping its potential, reducing the risks – was the first coordinated by the EC and saw the participation of many important players and experts in the field. Our presentation was focused on the role of social media in crowdfunding and the interrelation between the two. Below the major points touched during the presentation. 

The crowdfunding evolution has been developing in parallel with the social media revolution

We’ve approached crowdfunding as a product of social media, and we’ve always been looking at it mainly from that perspective. Social Media reduce some geographical and mental barriers allowing for the rise of crowdfunding, and then served as a tool to facilitate it. The idea of ??collecting funds from various donors or investors is certainly not new, but crowdfunding goes far beyond this, and it does so by adding the power of social networks to collective funding.

Of course, the viral reach of social media has a great impact, but it’s not only about that. Crowdfunding is also about community, engagement, participation, empathy, all enabled and fostered by web 2.0 technologies.

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A new mindset and the sense of empowerment

Crowdfunding is a phenomenon which emerged from and is facilitated by the new behaviours and the mindset that come out from the constant and almost invisible interactions happening online everyday. These interactions are allowing for a continuous conversation with our “peers” at a global level, thus helping on one side to increase our knowledge of society as a whole, on the other side to grow a sense of identification with the crowd, and to get that validation from the masses that empowers us to do something that we would have never thought ourselves to be able of. Everybody can be an inventor or an investor today. Whereas social media lowered the barriers to access (and production) of information, crowdfunding lowered the barriers to access (and sharing) of capital, fostering a democratisation of innovation and philanthropy.

New expectations of return

This mentality explains also the emergence of a new type of transactions on a web 2.0 environment, transactions that are not always activated in order to buy something. In many cases the expectations of return have changed. Already with the emergence of crowdsourcing we have seen the birth of economic models based on reputation and recognition rather than on money. With crowdfunding the same can be true: the rewards are often non-monetary and, in most cases, they represents a collective return rather than an individual one.

Social Proof, the value of relationship capital and the viral power of social media

In crowdfunding, relationships are important, all the social ties, weak or strong, that we have online and offline. We refer to them as social and relationship capital, the first being measured in quantity (so how many friends, fans, followers we have), the second in quality (actual interactions, conversations and reciprocal trust). Again, social media plays a great role here, lowering geographical boundaries and allowing for more of those ties to emerge. Now the social networks of entrepreneurs can be much wider, and this is fundamental to crowdfunding. Social ties provide a signal to the public that the project is worthy, it’s the so called social proof: we all tend to look to the actions of others to guide and validate our actions. When we fund a project, we are more ready to vouch for it and to engage some of our most immediate networks. And so do our contacts. And social media gives an unlimited potential to the expansion of the networks.

Social Media provide the right tools to go beyond our most immediate circle of contacts and get to a broader group of strangers. The strength of weak ties, or social capital, can have a value, especially in the aggregate. But the role of strong ties or relationship capital is often bigger: they are the first helpers, building trust and providing proof of legitimacy to a project, they validate it for late-supporters. The networks, and crowdfunding, expand to the rhythm of community advocacy.

Trust, transparency and crowd validation

The vicinity, the sense of identification and confidence brought in by the continuous interactions on social media also allowed for the rise of a new value: trust. Trust is established because we know each other better, we interact with each other every day, and because all the social media infrastructure allows for a transparency that has never been experienced before. Trust tags are vital to crowdfunding because trust is also what can transform a social tie in an economic tie. Trust, enabled by transparency, in turn facilitated by all the social media infrastructure, is a new currency in economic transactions.

Trust is also what allows to a large extent  this environment to regulate itself. Crowdfunding, occurring in a web environment, generates an obvious worry: the possibility for fraud. But let’s not forget that crowdfunding is facilitated by social tools: the public, transparent nature of it should help identify and stop bad behaviours. Probably, transparency could have a great impact in weeding out fraud, and the use of social and public components in a crowdfunding campaign can provide a high level of protection in what is essentially a self-regulating and self-monitoring environment.