Raising money via the crowd

The Mechabrick game.

The Mechabrick game. - Credit: Archant

Crowdfunding has become an alternative to raising money via a bank loan. Ross Bentley spoke to two Suffolk enterprises who have used the power of the internet to generate funds for their business ventures.

Matthew Neale, regional managing partner at Haines Watts Chartered Accountants

Matthew Neale, regional managing partner at Haines Watts Chartered Accountants - Credit: Archant

In recent years, a growing number of businesses have raised money for projects through crowdfunding or peer-to-peer funding as the aproach is also known. Rather than going to the bank for a loan, the term refers to the practice of raising monetary contributions from a large number of people, usually via the internet. A host of website-based services, such as Funding Circle, Kickstarter and IndieGoGo, have sprung up, offering to put people with a business venture in contact with potential investors or lenders. According to Forbes magazine, the global crowdfunding economy grew to more than $5billion in 2013, most of which was to be found in emerging economies such as China. But there are examples of businesses in Suffolk who have generated funds via the crowdfunding route. One company is Haines Watts Chartered Accountants, which has six offices in East Anglia including Colchester, Diss, Thetford and Hadleigh. The business borrowed £65,000 via Funding Circle in February 2014 to help with the acquisition of another firm of local accountants in order to move their business forward in line with their growth plans.

Regional managing partner, Matthew Neale, said it was “quite a straightforward process”.

“Although we could have borrowed from our bank, we decided to try Funding Circle as one of our clients had previously raised money through them,” says Matthew. “We wanted to test how the process worked so we would be able to advise our clients, based on our own experience, on this alternative source of finance.

“Initially you have to complete an online application to state how much you wish to borrow, the purpose and for how long. You also have to provide key financial information, such as turnover, profitability and projected figures, which is published on the website so potential investors have enough information about your business to make an informed decision. Funding Circle also carry out checks to assess your risk. In effect, you are given a credit rating – the less risk your business proposition, the lower rate of interest that you borrow the money at.”

Ben Jarvis, creator of Mechabrick.

Ben Jarvis, creator of Mechabrick. - Credit: Archant

In total, over 100 people lent money to Haines Watts. This pool was made up of a range of individuals, companies, partners and institutions. Through Funding Circle investors earn money off the interest on the money they lend. As an investor you can choose at what rate you lend your money but the system works like an auction where those who agree to lend at a higher rate can be displaced by other investors prepared to invest at lower interest rates.

Matthew continues: “It was interesting to watch - we saw the pledges come in and had raised the money we wanted in just 23 hours – although not at the rates we had hoped. Then we saw lower interest rates come in and ended up with a mix of lenders at a mix of competitive interest rates.”

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“Our business is an SME enterprise, it’s also an owner-managed business, just like the clients we advise. Businesses like ours are owned and run by the entrepreneurs of the country and from time to time we need bank funding for working capital and other purposes. Banks are not always forthcoming. They tend to work on a scorecard approach, which means some businesses are deemed too much of a risk and aren’t able to borrow money from their bank even though they might have a great idea and are a viable business.

He adds: “Funding through sites like Funding Circle brings together people and investors with individual ideas - as a result businesses with a higher risk get backing as the funding is made up of a larger volume of smaller amounts – it is spread across a number of investors as is the risk.

“The whole landscape of lending is changing. As things become more global, web-based and transparent I can see things moving this way. It certainly made the process enjoyable.”

Another Suffolk business that went down the crowdfunding route is Mechabrick - the brainchild of Ipswich-based Ben Jarvis, who along with his business partner raised finances through the Kickstarter website. Mechabrick is a board game that incorporates lego-compatible plastic robots fighting in a futuristic cityscape and Ben took his idea to the Kickstarter website to raise funds to pay for the CAD design and plastic mould injection tools.

“Kickstarter today tends to be aimed at computer games and increasingly physical games like board games,” says Ben. “The deal is that people pledge money in return for receiving the product being developed. In our case, we agreed to send a presentation pack of the board game and a number of robots to people who had pledged us money.

“In some ways Kickstarter is a victim of its own success and has become something like Amazon in a lot of ways, where people will pledge money in return for receiving new things. Many people treat it as an advertising tool – not only using it to raise some funding but also to market a new product and to let people know a new product is in production.”

Ben raised £20,000 from just over 300 people. Around 70% of the funding came from US backers. “The market for table top games and board games is huge in the US. Many ideas on Kickstarter are pitched from the UK and funded by US backers,” he says.

While Ben said he knew they required around £25 – £30,000 to get the project up and running and to pay for the tooling, they initially asked for only £13,000 – this, he said, was a calculated risk because of “the unwritten rules of using Kickstarter”.

He continues: “If we had asked for the full amount it would have taken longer and we would have needed more backers to reach the critical 100% funded point. With Kickstarter, backers are able to pull out right up until the end of the campaign. Often, the campaign lasts a month but if you haven’t reached your total or are near your total within the first week, people start to get concerned it won’t reach its target and cancel their pledges, then others notice the total raised going down and it goes into a downward spiral.

“You need to reach funding rapidly, so people think they are backing something that is definitely happening. You have to use techniques to keep people interested – - we added in stretch goals – we offered additional robots to keep people interested. It’s a balancing act - you have to ask for enough that, if you reach just 100%, you can still cover the costs of making and shipping what you have offered but not ask for so much that people lose faith in you reaching your target quickly.”

Ben says for his next Kickstarter campaign he intends to hire someone to run it. “To be successful and to generate a buzz around your project, you have to be on the right forums with comments and images. It can be impenetrable if you don’t know your way around things,” he says.

As for the Mechabrick project, an unforeseeable financial issue unrelated to it the meant production of the game had to be put off for almost a year. But the company is now at the point when it can start manufacturing the games.

He adds: “Legally there are plenty of disclaimers on Kickstarter to remind people they are investing in a risk and that delays might occur. We were as open as possible and informed supporters straightaway that there was a hold-up. Our backers have been brilliant – all through the last year we have given them monthly updates and we’ve only had two or three people kick up a fuss out of the 300 backers.

“Now that production is due to start, our first priority is to send games to our backers with extra robots and scenery to thank them for their patience and for sticking with us. It’s important we have a happy customer base as they are likely to be the audience for future Kickstarter projects.”