What started as a niche form of raising funds is rapidly turning into a mainstream financial activity with the power to do social and environmental good.
It is a sunny spring day in Bristol. Hundreds of people are gathered on one of the city’s busiest roads to watch dozens of their fellow citizens careen down a 90-metre water slide made of hay bales, plastic sheets and washing up liquid. This street-turned- water-slide is a one-off installation by local artist, Luke Jerram, and part of a wider project to reclaim the city’s streets for the community. But it is the way it was funded – via an online crowdfunding platform – that might ultimately make more waves than the installation itself.
Crowdfunding is nothing new. It was commonplace in the Middle Ages and has financed the construction of many of our historic buildings, from Gothic cathedrals to the Crystal Palace. But with the internet and increasing global interconnectivity, it has come into its own, providing new ways to fund anything from a wind farm, to the latest tech start-up or the come-back tour of an ageing rock band. In the last few years crowdfunding has gone from a niche way of raising money to a mainstream means of financing big projects.
Since 2012 the alternative finance industry – crowdfunding, peer-to-peer lending and other means of non-traditional online finance – has grown at a yearly average of 146% across Europe, increasing from €1.2 billion to €2.9 billion in 2014 alone according to a report by the University of Cambridge and EY. Much of this comes from the UK where the industry has swollen by 168% to €2.3 billion in 2014. And the growth is expected to continue, exceeding €7 billion across Europe in 2015, according to the same report.
“It’s definitely moving into the mainstream,” said Bryan Zhang, one of the writers of the report and a director at Cambridge University’s Centre for Alternative Finance. “It offers a real alternative that enables investors to have the power to choose what ventures they want to back.” This enables what Zhang calls “affinity investing” – people who have an affinity with social or environmental issues can invest directly into projects in those areas. In the past, according to Zhang, “those investment channels weren’t there so you didn’t have a decision where your money went. But now through crowdfunding and peer-to-peer lending you actually have a choice. That empowerment is really important.”
It is this empowerment which makes crowdfunding an increasingly popular tool for social and community projects, according to Heather Forster, a business consultant and crowdfunder-in-residence at Plymouth University: “I think the reason why it’s so successful is because in this digital, nuclear-family world we live in, people have lost sight of community and what is so inspiring about crowdfunding is that it engages the community. What crowdfunding enables is for people to help people to make things happen.”
“What is so inspiring about crowdfunding is that it engages the community. Crowdfunding enables people to help people to make things happen.”
Heather Forster, Plymouth University
People power and a renewed sense of community are the focus of an increasing number of crowdfunding sites that target social and community projects. One of these is Spacehive, which funded the Bristol water slide and is currently sourcing funding for other community ventures like saving a Grade II listed dispensary in Manchester or creating an outdoor ecology classroom in Greenwich. Spacehive is a donations-based platform, but others aim to show that social projects can be just as much about making money for investors as doing the right thing. One such is Ethex, a not-for-profit crowdfunding platform providing a range of investment opportunities in social, community and environmental projects.
“The slight misconception is that if you are a social enterprise or charity that you don’t actually have any revenue apart from donations,” said Ethex’s CEO, Lisa Ashford. “If you have a revenue stream then, depending on the financial projections, you may be able to pay an interest rate to your investors. And that is the case with our projects. They do pay a reasonable return to our investors.”
These returns have driven £13.5 million in investment in the two years since Ethex was founded, mostly into community energy projects. Other social investments that Ethex customers can make include buying bonds, shares and debentures in projects as diverse as community leisure centres, homes for people with learning disabilities or a spiritual and holistic education community in Scotland.
The environment is also benefitting from crowdfunding with platforms such as Abundance and Trillion Fund focussing on partnering investors with environmental projects. Since its start in 2011, Abundance has raised over £9 million for renewable energy projects such as wind turbines and solar panels for schools. For managing director, Bruce Davis, crowdfunding environmental projects not only puts the power back into the hands of communities but also provides developers with a means of winning over those communities to their projects. “The simplest way of doing that,”hesaid,“istoallowpeopletoinvest, because it’s real and they have a shared interest in the project – you feel like you’re part of it and it’s not something that’s been done to you.”
Abundance investors purchase debentures, essentially long-term loans with fixed rates of interest paid annually, making them more secure and higher paying than other fixed-term investments. “With a bond you get all your capital back at the end,” explained Davis. “With Abundance you get your interest back each year, getting a higher return because money in your hand is worth more than in a few years.” Investors can lend as little as £5 on any one project but Abundance has seen investments of up to £300,000 with an average of around £4,500.
Davis sees Abundance moving increasingly into the mainstream, attracting more traditional and higher-net-worth investors who are looking for more control over where their money goes. One of the reasons he sees for the rapid growth of alternative finance in the UK is the recent regulation of the industry which, rather than stifling it, has made it more flexible and efficient: “We have a regulator that understands the sector to a point and a structure which allows you to innovate and develop new models all the time.” This sympathetic regulation means that whereasittookAbundance18months to work its way through the red tape as a start-up, it should, according to Davis, be nearer six months for new platforms to do the same.
“We don’t think it’s going to go away. There’s going to be some questions and probably some criticisms but we think it’s going to be a significant part of the financial system.”
Liam Collins, Nesta
Another sign of its growing acceptance into the mainstream is the increasing interest from traditional banks. “We’re seeing institutionalisation really happening in the US market,” said Zhang, “and it’s going to take hold in the UK market at a slower pace. Some of the banks have acquired shares in peer-to-peer lending platforms and some have started launching their own.”
In the UK, Royal Bank of Scotland and Santander have partnered with peer-to- peer lending platform, Funding Circle, referring any declines on business loans to the alternative finance provider. And next year new rules are expected to come in where all banks will have to refer businesses they can’t fund to alternative finance platforms. This, combined with the
launch later this year, of peer-to-peer, tax- free Individual Savings Accounts (ISAs), is expected to give a further boost to the industry. The Government, too, is getting in on the act with the government-owned British Business Bank investing £87 million into alternative finance platforms. And, in an effort to stimulate alternative funding tocharitiesandsocialenterprises,the Cabinet Office has just launched its pilot Peer-to-Peer Social Impact Fund, providing £2 million of back-up funds which can be drawn upon by organisations in the case of default.
All in all, crowdfunding has come a long way since its humble beginnings in the late 90s when British rock band Marillion created an online ‘tour fund’ raising US$60,000 in donations to finance their US tour. This went on to inspire US-based ArtistShare, now acknowledged as the first crowdfunding website, where fans could donate to their favourite artists in return for access to the creative process. Meanwhile in the UK a website called JustGiving was set up to assist donations to charities and good causes, thus launching crowdfunding into the social sphere.
In 2005 not-for-profit Kiva.org was set up to provide lending to underserved entrepreneurs and the following year the US saw the launch of its first peer-to- peer lending platform – Prosper.com. Alternative finance as a two-way process, making money for investors and raising capital for ventures, had arrived. But it was the global financial crisis that really kick-started the industry, where reduced lending by banks to SMEs coupled with plummeting interest rates, created a perfect storm among lenders and borrowers in which alternative finance could thrive. By 2011 the first equity crowdfunding platforms had come online – essentially allowing investors to play Dragon’s Den by buying shares in a wide range of start-ups. By 2013 the alternative finance industry as a whole was estimated to be worth £5.1 billion with over 500 trading platforms and 9,000 registered domain names related to alternative finance.
This growth, and the move toward the mainstream, isn’t expected to stop. A 2013 report commissioned by the World Bank predicted the global crowdfunding market to reach up to US$96 billion by 2025 – roughly 1.8 times the size of the global venture capital industry today. “The future is us moving into the mainstream and being seen as something as normal as premium bonds,” said Bruce Davis. “We’ll be more integrated into the system in that people will probably have a crowdfunding account in the way they now have an ISA.” Liam Collins, a senior researcher at innovations charity Nesta and co-author of their report on the growth of crowdfunding, agreed. “I wouldn’t be too surprised if, in the next couple of years, we see one or two of the bigger sites getting acquired by banks,” he said.
Collins is optimistic about the continued growth of the sector although he thinks there will be some bumps along the way. “It’s still in the early days and we haven’t seen medium or long-term performance. So equity investments – how will they pan out? Some people will lose money as it’s high-risk investment. Will the losses be such that they challenge the long-term validity of the model?” He has similar concerns over peer-to-peer business lending if the global economy hits another downturn but overall he believes the strengths of the industry – the powerful infrastructure of the internet, the direct link between lenders and borrowers and the empowerment of investors – will be enough to see it through. “We don’t think it’s going to go away. There’s going to be some questions and probably some criticisms but we think it’s going to be a significant part of the financial system.”
Heather Forster agrees but for her it is the people and communities behind it that will provide crowdfunding’s enduring strength. “I don’t think we can expect institutions to help us anymore. I don’t think we ever should have done. What crowdfunding is about is people helping people. It’s power to the people.”
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Photo Credit: Jorge Quinteros from flickr