NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, September 25, 2015

Equity crowdfunding platforms are “crowding out” banks, venture capitalists and business angels in the UK, suggests a new paper published by researchers from the University of St Andrews and the University of Stirling. St. Andrews explains that UK startups are “embracing the £146 million Crowdcube economy.” Crowdcube may be the largest investment platform but other sites like Seedrs and SyndicateRoom are playing a significant role in this financial transition.  The paper builds upon existing research in the space including, Mollick’s, Cambridge University and more.

The document was published as part of the University of St Andrews’ Working Papers series, and states the UK has quickly established itself as the “fastest growing equity crowdfunding market in the world.” Sixty-nine percent of the 42 British entrepreneurs who participated said they used equity crowdfunding as a result of a “perceived lack of other financing alternatives available.” One entrepreneur said,

“Banks are just too expensive and VCs [venture capital] want too high an amount of money. Also, they require you to have revenue, so when you don’t have revenue it’s a pretty hard thing to crack. And it’s not like Silicon Valley where people will invest in pre-revenue companies based on valuations of individuals like engineers or MBA candidate.”

Another echoed the sentiment, perhaps reflecting a growing trend where banks are viewed as a less desirable option;

“We didn’t even look in to [a bank loan]. We felt banks would not fund us for the amount we needed and the limited experience we had under our belts.”

Many participants in the research noted that crowdfunding “offered relatively favourable valuations of their companies, in contrast to business angels, who tend to be tougher on price".