Monday, April 28, 2014
Once Philip Martin got his Mexican restaurant business up and running in Dublin, he knew exactly how he would find the finance for his next venture, a tortilla bakery. “I decided well before the concept of Blanco Nino was even a glimmer in my right eye that my next project after Little Ass Burrito Bar was going to be crowdfunded,” he said.
Martin’s proposal to build Europe’s first real corn tortilla factory in Ireland proved a hit, raising more than double its £60,000 (€73,000) target on Crowdcube, an equity crowdfunding site.
“The businesses launching on these platforms weren’t just raising capital, they were raising a community,” said the entrepreneur, “a community of enthusiastic, influential, like-minded followers who wished not only to support the business by buying its products but also by opening doors, providing advice and spreading the good word.”
Crowdfunding is a way to raise money for a project or venture by asking people (the “crowd”) for contributions, typically online. This funding can be in the form of donations or investments.
A rapidly growing number of Irish ventures have got a boost from crowdfunding. In Donegal, online meal planner Sian’s Plan exceeded its £100,000 investment target on Seedrs; Dublin rock band Fight Like Apes raised €20,000 through Fund It to record a new album; and Dublin-born tennis player James Cluskey has received more than €13,000 in sponsorship via PledgeSports to fund his bid to qualify for Wimbledon this year.
Yet crowdfunding remains unregulated, with little protection for investors or promoters. Last year, the European Commission held a public consultation on the sector, highlighting issues that need to be resolved for this fundraising method to flourish in Europe.
At the top of the agenda are building trust among consumers; addressing fraud and consumer protection concerns; and keeping track of the legislative approaches adopted by different nations. Other EU countries have taken steps to regulate crowdfunding or establish legal guidelines, but Ireland is lagging behind.
There is no specific regulatory regime to deal with crowdfunding here, says Eoghan Doyle, a senior associate at Philip Lee Solicitors.
“The existing legislative framework was not built with crowdfunding in mind,” he said.
The absence of legislation presents a pitfall for both crowdfunding platforms and projects. “It also puts Ireland at a disadvantage in terms of encouraging new start-ups in the space and protecting investors,” added Doyle.
A legal framework or guidelines would boost mainstream acceptance of crowdfunding, provide certainty to platform providers and projects, and enable Ireland to leverage its start-up community.
If Ireland can sell itself as a location for trustworthy crowdfunding, it could attract more businesses and in turn create more jobs, according to Doyle. One study cited by the European Commission estimated that 7,500 direct “crowd-jobs” were created in Spain through 2,800 successful crowdfunding projects.
Doyle said that Irish legislators can take action now to establish a more regulated crowdfunding market, or they can wait and see how recently adopted models in countries such as France, the UK and America pan out.
“The risk is that we lose competitive advantage,” said Doyle.
“On the flip side, we can obviously learn from any mistakes and adopt a regime in a more mature environment.”
For Doyle, the key is striking a balance, with minimum disclosure requirements to assess credit risks that do not overburden project owners or platforms.
“I believe that some form of vetting is required,” he said. “As to how far this should go — that’s a tough one. We need to be careful not to make compliance for platforms and project companies overly expensive, or it will kill the potential in this space.”
A 2013 industry report by Massolution estimated that almost 500,000 projects were financed in Europe through crowdfunding in 2012, raising €735m. This marked an increase of 65% on the total raised in 2011, and the forecast for 2013 was €1bn.
Ireland has no shortage of active crowdfunding platforms. Business to Arts established Fund It, an all-island crowdfunding website for creative projects in 2011. It has hosted 828 completed campaigns, of which 613 have been successful, with total pledges approaching €2.5m.
Fund It paved the way for crowdfunding, educating consumers and campaigners while establishing a trustworthy environment.
“For us, trying to make crowdfunding as feasible and as risk-free for everyone is something that we’re keen to do,” said Andrew Hetherington, Fund It’s project director.
Credibility is crucial to crowdfunding transactions. Fund It operates as a middle-man in the transactions, said Hetherington, moderating projects on its platform to ensure their viability. This has led to a project success rate of 74% — far above the 44% hit ratio at Kickstarter, one of the biggest names in the crowdfunding game.
“People may not agree on the final outcome or delivery of a project,” said Hetherington, “yet it’s part of our reputational risk as a platform that we should be proactive in making sure people deliver rewards.”
Central to Fund It’s integrity is an “all or nothing” stance: if the target budget cannot be reached, it is highly unlikely that the project can be delivered and so no funds are released. All are freed from obligation with their cash intact.
PledgeSports takes a different approach. Richard Pearson created the platform to fill a funding gap in sports.
“The money at the top end is increasing all the time but, at the other end, it’s still static,” he said.
PledgeSports launched in Ireland two months ago and has already raised more than €50,000 for equipment, travel expenses, competition entries and other costs that come with a sports career.
Its reach widened to Britain this month and Pearson plans to go live in America by mid-summer.
Pearson’s platform differs from Fund It in that all funds raised on PledgeSports are given to the athletes, no matter how far off the published target. “The people who are donating want to see these guys succeed so I don’t think it would sit too well with the fans if we were refunding money,” he said. Like Fund It, PledgeSports retains 8% of the money raised on the platform to cover maintenance costs. Out of 10 campaigns completed on the site to date, three went above and beyond their target and two more achieved more than half of their target.
“It’s not just about funding, it’s also a very important marketing tool,” said Pearson. “It gives any athlete or team the ability to promote themselves, raise their profile and increase their fanbase, while bringing in money at the same time.”
PledgeSports even plans to take this marketing angle one step further and become one of the first platforms in the world to bring commercial sponsorship into crowdfunding.
The plan is to entice local businesses — which are already contributing about 25% of the funding raised on PledgeSports — to sponsor teams and athletes in what would be a positive public relations move.
Tortilla maker Martin now believes he would not launch another business without some crowdfunding — yet that is not to say he sees it as an easy alternative.
“Crowdfunding is a great deal more laborious,” he said.
For Martin, the necessary ingredients for crowdfunding success are a great story, a bulletproof business plan, a visually great brand, a polished and inspiring video pitch and a base of enthusiastic followers. “These are all quite big challenges by themselves, but all essential,” he said.
“As social creatures, we want to support ideas and people we like. Crowdfunding allows people to do this and get involved in new business ventures and adventures that they believe in.”