Angels Den Founder Bill Morrow on ‘Crowdfunding’

Crowdfunding - Will all the pieces fit together?

Crowdfunding, a model that raises funding for start-ups by harnessing the power of the Internet investor crowd has grown from similar models that already exist in the US, but Crowdcube is the first website of its kind to be launched with UK businesses in mind – will it provide all the answers for entrepreneurs who need investment?

“There is something very attractive about the concept and we at Angels Den applaud anything that makes funding more available to the masses”, said Angels Den founder,  Bill Morrow, when I asked him about crowdfunding, the Internet innovation which threatens to shake up the world of start-up financing.

However there are rumblings in some quarters that crowd sourcing for business investment may not provide the answer in all cases. There are already some business angels and entrepreneurs who have expressed doubts about having large numbers of investors involved in a single business idea.

“Making the BIG assumption that making a financial promotion to a large number of “unsophisticated” and inexperienced investors can be said to be legal [and I remain unconvinced about this, just wait for the first widow or orphan to complain that they did not understand what they were getting into] means I do wonder if having a multiplicity of investors serves the entrepreneur in the medium term.”

There are concerns that the crowdfunding concept may have its limitations for both business angels and entrepreneurs particularly where they need to be in agreement on the investor investee arrangement from the outset to make sure things run smoothly. “We have 6 investors and they often pull us in a different direction to that which we feel is right. That is their right, but in common with most start-ups this is confusing and time consuming.” explained Bill, “Having 1,000 investors, each with their own agenda is going to be a nightmare, no matter how it is dressed up.

One of the benefits of having a business angel invest, is not just about their money … they bring their experience and little black books of contacts. They want to share these and I wonder if much sense of ownership can really be had, by investing £10. Will this be enough to motivate the investor to share their experience? And even if it does, coordinating 1,000 “good ideas” will take a lot of energy.

He added “I also wonder if an entrepreneur feels comfortable telling the world about his business. There are a lot of unscrupulous people out there. Our deals can only be seen by those who have complied with FSA guidelines, even then, confidentiality is THE number ONE question entrepreneurs ask us about.”

Despite highlighting these concerns, Bill welcomes the opportunity Crowdcube could provide entrepreneurs starved of growth capital. “We wish the concept well. Given the death of the banks and the lack of Friends and Family monies it is extraordinarily difficult to find growth funding these days …. We have over 4,300 certified angels and we find it hard, even though we are amazingly selective about those we take on. Currently we reject 13 companies for every one we take on and we find that even then we still only fund about 40% of those.

Against this, should the first deal actually get funded, the social media PR that this generates will be substantial and attract professional angels to take a deeper look at it …. Maybe 1,000 people all cannot be wrong?

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  • Dan
    Thanks for the article! Great!
  • It is true that the issue with just crowdfunding, as pointed out in the article, is that you do not get the mentoring that usually comes with the money.
    And telling a good story to a crowd is not necessarily an indication that the business itself is good. A good story teller may not be a good businessman.

    To resolve these issues, there is an alternative to crowdfunding as presented here, which offered the benefit of providing both access to money and mentoring.
    Entrepreneur Commons is providing peer-support to entrepreneurs, and we are now raising a mutual guarantee fund that will give access to funding to entrepreneurs from within the network.

    From the Angels prospective, Entrepreneur Commons also provides value by managing the pre-funding pipeline is a much more efficient way. Everybody is welcome to participate in the meetings, and they will mature through the process until they are vested by their peers to be mature enough for funding.

    Check us out at http://www.entreco.org and tell us what you think.

  • Neil Lewis
    It is an interesting idea that crowdfunding is a great way to raise a bit of cash but an even better PR expercise.

    Some people have suggested (on the LinkedIn forum) that this model fits social enterprise particularly well – where, say, a community wants to invest in a local not for profit business.

    The other model where this might work well is where the 1,000 investors are also customers! If so, 1,000 customers sounds good….

    Br
    Neil

  • Brett
    I wonder though, knowing how slow ‘the crowd’ can be with investing their cash, how long it will take to raise the money required? With a tenner here and a tenner there it could take some time and while your business is sitting there on the website, someone else could be busy stealing the idea.
  • I agree with the limitations of crowd funding. However, when you look at the market as a whole crowd cube, for instance, is providing a much need platform for investors and entrepreneurs to interact. The low amounts investors can invest allows them to try and take risks. This then helps to nurture the risk taking mind set commonly found in the US, which we all look up to.

    The risk taking mindset helps more people to consider becoming an entrepreneur and allows first time or low value investors with access to investments they may believe in, especially when its free up front !

    Look forward to other thoughts.

  • Louise Bagshaw
    I agree with the issues mentioned above with equity crowdfunding, it certainly is a great way to get some small cash together and get the idea off the ground. This is good to then take on to VC and Angels for further funding.

    However the real power of funding comes from the non equity modals, take a look at US giant kickstarter they are raising in excess of $1million a week and kickstarters UK alternate sponduly.com simply engage with your existing and new fans and bring your idea to life faster than any equity platform can offer. Great success includes a 15k project raising over 900k of startup funding.. This is crowdfunding!

  • I agree with Neil.
    Crowdfunding is more then raising cash.
    I run a crowdfunding site on http://www.fundedbyme.com and we see that the money raised are just a great side-effect.
    The backers, happy to be part of your project act as ambassadeurs and the amount of feedback you get even when not succeeding in crowdfunding is really important.
    /Daniel Daboczy http://www.fundedbyme.com
  • I think kickstarter.com is where it is at for new product start ups. Customers buy a product and only if the product achieves the finding goal do they get charged. Win Win I think.

    Then form an investors POV they can see traction in terms if sales and and customer base

  • Pingback: Angels Den Founder Bill Morrow on ‘Crowdfunding’ | iBusinessAngel : Sharing Links to Crowd Funding Websites, Articles and Videos()

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