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Personal finance: A way of raising money that aims to stand out from the crowd: Websites bringing investors together with projects seeking financial backing are booming. Harriet Meyer looks at the risks

June 15, 2014

Harriet Meyer



Would you help pay for a book to be published that features tales from mums caring for children with life-limiting conditions? This is one of thousands of crowdfunding projects seeking funds. Lives Worth Living is asking for pounds 7,500 on website Crowdfunder to cover costs. In return, you receive a copy of the book or even a page dedication, depending on the amount.

The phenomenon of crowdfunding is booming. You can stake from just pounds 10 to emulate the likes of Duncan Bannatyne by becoming a "mini-dragon", backing an ever-expanding range of ventures from theatre productions to electronic gizmos. A musical production of The Wind in the Willows is among thousands of projects taking part in the trend, raising pounds 1m earlier this year.

But as this craze gains momentum, what are the risks? A wide range of websites have sprung up bringing investors together with projects seeking a cash injection.

The Crowdfunding Centre said more than pounds 3,500 per hour is being raised in the UK. Since the beginning of 2014, more than 6,561 projects have been launched.

In return for your investment you may be offered a tangible "reward", such as tickets to a gig or a T-shirt, an equity stake in the business - or even a share in a buy-to-let.

Typically, crowdfunding websites benefit by taking a percentage commission of money raised, at an average of 5%, alongside - sometimes - a slice of returns paid to investors. So check the fine print.

The House Crowd says its participants can put from pounds 1,000 down on a buy-to-let property to receive a guaranteed 6% net return per year plus a share of profits on sale. Alternatively, they can opt for a fixed return of 7.5% net a year with no equity in the property. A typical property currently listed is a two-bedroom terrace house in Moston, Manchester, valued at pounds 68,000 after refurbishment.

Experts warn that investors should check crowdfunding site credentials carefully. Property expert Henry Pryor says: "There are many new opportunities and the vast majority will be bonefide operations but potential investors should check just who or what they are before they hand over their money.

"I fear that we are going to find a significant number of hooky sites that will promise you the world, take your money and leave you feeling very stupid."

The majority of the sites offer warnings stating that investors risk losing their cash if new ventures fail, typically via an online questionnaire. However, some check enterprises more extensively than others.

Since April, the sector has been regulated by the Financial Conduct Authority. It says this should stop crowdfunding websites running off with your cash, but it won't prevent a small business you've backed from failing. Christopher Woolard, director of policy, risk and research at the FCA, says: "We want to ensure that consumers are appropriately protected - but not prevented from investing. The rules provide consumer protection while allowing businesses to continue to have access to this innovative method of funding."

Here we look at some of the projects on offer.

Music, art and films

Kickstarter, which originated in the US, offers a massive range of reward-based projects. It opened its doors to British investors in October 2012.

The Observer found a staggering 3,381 projects seeking funding, ranging from mobile phone apps and circus performances, to an "eco" magazine for kids. It lists the percentage of the total amount sought that has been pledged so far, and how many days there are left to invest.

A project has to reach its goal before the deadline, or no money changes hands, and less than 50% make it. The minimum pledge is usually pounds 1 or $1. However, beware that the site "does not investigate a creator's ability to complete their project".

Among those projects listed as successfully funded is a truck offering "Good & Proper" tea to Londoners. This asked for pounds 10 or more in return for a bag of tea, to free hire of the van for a party or wedding if you could stretch to pounds 1,000. It sought a total of pounds 10,000, and successfully raised pounds 14,682.

Energy

Among the sites that target green-energy are Trillion Fund and Abundance. Trillion Fund launched a new crowdfunding platform last week that enables people to lend directly to renewable energy projects from pounds 50, in return for an income. Typical returns on the site range from 3%-9%, with terms ranging from three to 20 years. Rebecca O'Connor of Trillion Fund says: "Loan-based renewable energy crowdfunds have more in common with bonds than with equity crowdfunds, because they can come with fixed interest rates over a few years."

"Buying an equity stake in an early stage start-up is considered more risky than lending against an operational wind project, for example, because, with the latter, there is historical performance and revenue data. The amount of energy - and therefore revenue - that solar panels and wind turbines generate is relatively predictable, which means funders have a sensible idea of what their returns will be."

Abundance has crowdfunded pounds 6m of projects so far, with a mix of wind and solar energy in the UK. You can invest as little as pounds 5. You buy debentures, similar to IOUs and, in return, you are paid a share of the profits from generating green energy. The site has three projects open for investment offering a range of fixed and variable returns over 20 years of between 6.75% and 9%.

For example, Engynious Schools is seeking pounds 1m to share ownership and returns with private investors from solar panels it owns on 19 schools across the UK. On average, an investor places about pounds 5,800 across three or more projects, according to founder Bruce Davis.

Small businesses/start-ups

There is a large range of sites.InvestingZone was launched in May 2013, and offers a stake in some early-stage companies. It says it only allows people to invest if they understand the risks.

SyndicateRoom, another newer entrant, offers users the chance to "top up" large stakes in a business that have been bought by established investors.

Seedrs and Crowdcube are among the well-established, both offering a minimum investment of pounds 10. Seedrs rasies an average of pounds 1m each month for start-ups that are struggling to get off the ground, and says it is up to the investor whether they are happy to take the risk on a business they hope will succeed.

Some high-profile figures are joining the crowdfunding throng. Fund manager Nicola Horlick attracted pounds 150,000 in just one day last year through Seedrs towards fund management firm Glentham Capital. This success prompted her to launch Money&Co, a crowdfunding website with risk ratings for each business seeking funding.

Among other sites, Peoplefund.it

and Crowdfunder feature creative enterprises seeking backing in return for rewards. On Indiegogo, you can put money towards political campaigns, humanitarian projects and technology start-ups. Buzzbnk and CrowdBnk also include a variety of projects, from charities to many other businesses.

Some sites are more niche. For example, unbound is a crowdfunding website and a publisher, while MoolaHoop exclusively lists business ventures from female entrepreneurs.

Captions:

Don't be fooled by the glum face, Mr Toad of Wind in the Willows fame is benefiting from the new crowdfunding boom. Rex Features

Fund manager Nicola Horlick launched her own crowdfunding website.



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Source: Observer (UK)


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