Crowdfunding What is it and how does the future look like The Finance IT Day

1. Crowdfunding What is it and how does the future look like The Finance IT Day September 11​, 2014​ Peter Baeck, Principal Researcher, Nesta peter.baeck@nesta.org.uk @PeterBaeck

2. About Nesta A £340m endowment with a mission to help people and organisations bring great ideas to life.

3. Research and programme work on crowdfunding?

4. Research and programme work on crowdfunding?

5. What is it? crowdfunding is a way of financing projects, businesses and loans through small contributions from a large number of sources, rather than large amounts from a few. the contributions are made directly or through a light–touch platform rather than through banks, charities or stock exchanges

6. Different models Reward based: Enables people to contribute to projects and receive non–financial rewards in return, usually operating a tiered system where the more you donate the better the reward you receive. £% Lending based:Projects or businesses seeking debt apply through the platform uploading their pitch, with members of the crowd taking small chunks of the overall loan. Equity based: Enables the crowd to invest for equity, or profit/revenue sharing in businesses or projects. This form of the model has been the slowest to grow due to regulatory restrictions that relate to this type of activity. Donation based: Allows charities, or those who raise money for social or charitable projects, to gather a community online and to enable them to donate to a specific project.

7. £939m Market • Market grew by 91% from £492m in 2012 to £939m in 2013 • Provided £463m worth of early-stage, growth and working capital to over 5,000 start-ups and SMEs from 2011-13 • Will grow to £1.6 billion in 2014 and provide £840m worth of business finance for start-ups and SMEs 5,000 SME’s Supported £1.6 billion in 2014

8. Not just about rewards

9. The rise of the platforms Source: Massolution

10. UK Crowdfunding Directory crowdingin.com

11. Different sectors Education and research Public services’ Business’ Community and voluntary sector Arts

13. Allows entrepreneurs to tap in to different levels of motivation and support

14. Allows entrepreneurs to tap in to different levels of motivation and support

15. What it is so disruptive about crowdfunding? - how does crowdfunding add value?

16. Democratising funding and measuring demand in advance Crowdfunding is a powerful way of identifying what projects people want to see go ahead.

17. From mass production to personal production - Crowdfunding helps businesses serve a more diverse and personalised market, by backing what otherwise would fail to get funded.

18. Lower transaction costs - By giving investors more of a role in carrying out assessment, and automating more of the funding process, crowdfunding can reduce the transaction costs of getting capital to entrepreneurs, making financing cheaper.

20. Harnessing people’s motivations to get worthwhile projects funded The direct connection between entrepreneur and the crowd gives the entrepreneurs the chance to appeal to investors’ motivations and interests as well as their wallets.

21. Whatsnext – the future of crowdfunding £ £ £ £ £ £ £ £ £ £ £ £ SME £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ % % % %

22. Big and small funders learning to play together

23. Using the crowd to identify investment opportunities

24. Crowd investment alongside institutional investment Syndicate Room platfrom required 25% investment from Business Angel before opening up to the crowd In Lancashire , the council will lend an initial £100,000 to Lancashire-based businesses using Funding Circle,

25. High Street Banks partnering with P2P lending platforms

26. Pocket Parks Partnership between Spacehive and Mayor of London where small park projects (£10k or less) will have 80& of cost covered by London if they can crowdfund first 20% For project of value between £10k - £20k, people will need to raise 50% via crowdfunding to get the remaining 50% from the Mayor.

27. The crowdfunding support ecosystem and evolution of platform business models

29. Research in the pipeline ? ? ? ? ? ? Analysing transaction data from 25 platforms ? ? ? ? ? ? ? • Large study working with the 25 biggest crowdfunding platforms in the UK • Getting transaction from all platforms, to determine total size + trends and dynamics within market • Survey backers and fundraisers across the platforms (14K survey responses to date) to understand motivations and behaviours • National polls amongst SME’s and consumers to understand attitudes to crowdfunding Surveyed +14K crowd-funding users National polls of SME’s and consumers

30. Peter Baeck peter.baeck@nesta.org.uk @PeterBaeck www.nesta.org.uk/project/crowdfunding

31. What works when • Rewards • Easy to access opportunity to raise finance • Can test market demand & Cheap to fail • Can use feedback during funding process to iterate on idea • Don’t have to give away equity or pay back loan • Can be good marketing tool • Requires a lot of effort • Failure rates can be high • For products not businesses Lending • Donation • Ideally suited for projects with a social and local purpose • Hard to raise high amounts • Equity • Allow investors to benefit in success of venture • Potential for businesses to source larger investments • Decreases the cost for investors of building a diversified portfolio of equity investments • Businesses have to give away equity • Risk for investors to loose money • Possibility of regulatory restrictions • Managing large numbers of shareholders