Crowding In - crowdfunding report from NESTA

Crowding In

how the UK’s Businesses, charities, government and financial systems can make the most of crowdfunding

This month saw the publication of Crowding In NESTA’s report on the current situation and future possibilities of crowdfunding

The report points to recent growth in crowdfunding - which raised $1.5 billion globally in 2011 and an estimated £120 million in the UK 2012. It is possible that it could contribute £15 billion in the next three years making it a huge part of the financial landscape for business and charities. This sudden rise has been put down to the growth of the internet and the financial crisis - bringing together the means to raise money from wide social networks with the urgent need to do so.

NESTA is not the only organisation making predictions for the growth of crowdfunding. Mashable gives it as one of the Big Tech Trends of 2013. This Is Money made crowdfunding one of its top 5 business trends for 2013 (see my earlier post).

The report looks briefly at the motivations for donating and investing before outlining the process and stressing that crowdfunding is hard work.

Crowdfunding has a lot to offer

For charities and business it is an additional way of raising money. Donors and investors have more choices of how to spend their money. The report gives four main benefits.


  1. harnesses people’s goodwill
  2. has lower transaction costs than many other financial channels
  3. helps niche products get off the ground
  4. allows customers to become funders

This final benefit is seen by consumer analysts as being a key consumer trend. These consumers are called Presumers by the trend firm Trendwatching. Presumers are part of the expectation economy - consumers who want the best , now and first. Presumers increasingly engage with products pre-launch - the motivations are to be first, to gain status, to be part of something, to develop dialogue and relationship with the product. Crowdfunding offers a platform for this to happen.

The report talks about future possibilities

  • become a large part of business finance market - the key models are highly scaleable
  • be used to make charitable giving go further becoming a source of match funding for grants or loans
  • be part of a diversified portfolio for savers and investors


  • the possibility of using crowdfunding as away of financing what used to be the public sector, for example “could a proportion of the Government’s scientific research budget be allocated not by committees and councils but by a democratic process, run through a crowdfunding platform“. Some lottery funds are already disbursed through X-Factor style talent contests. Would crowdfunding, in this  instance, lead to greater scientific literacy and public engagement with research that matters to people. Or would it be an excuse for the government to further cut funding.

The challenges posed by the report

1. Equality -  due to the time and effort it takes to run an effective campaign

Crowdfunding could end up benefitting the larger, more established charities/businesses. However my research is that potential donors (donations/rewards model) are attracted to local and smaller organisations that benefit them personally or their community.

Will smaller investors (equity model) will be attracted to bigger and more established business or smaller startups?. Research undertaken by CrowdCube into the motivations of its investors showed that the majority not only believed the business idea they backed had a market but that they had “prior experience of the entrepreneur” and were “personally moved by the idea”. They also had a preference for British business as crowdfunding offered a way for the individual to make a value based impact on the economy.

That said - crowdfunding, whether donations or equity, does take time and resources to put together an effective pitch, action plan, active campaign and, in the case of equity - a robust business plan and financials.

2. US platforms drive out the UK ventures - with the money going elsewhere and not into the home economy

Kickstarter’s apparent success after its first month open to UK projects is a concern for the donations-based platforms. Some of the arts-based platforms might suffer as campaigners are drawn to Kickstarter’s light. Crowdfunder has merged with PeopleFund.It. It should not affect Buzzbnk, if they play their cards right, as they have so much extra to offer the third sector and Kickstarter’s guidelines rule out some charity projects.

It will not not affect the equity platforms as Kickstarter is purely a donations/rewards platform.

Will crowdfunding benefit from the furore non-payment of corporation tax and from the Occupy and localism movements? Crowdfunding could be a way people can change their local economy engaging in a disruptive financial, business and consumer model.

Risk and regulation

This is an important consideration - especially where equity crowdfunding is concerned. But regulation could stiffle the growth not only of platforms but this form of disruptive people-led funding. The regulations need to be both protective and enabling. The processes, decision-making and policing need to be open and transparent and involve investors, donors, campaigners as well as the platforms and their lawyers/accountants.

Standards and data

One idea is that there could be standards across financial products which make it easier for people to judge the worth of financial products. It would be interesting to see how this could work with such a diverse set of products on the market - for example, mortgages, investment bonds, the stock market and crowdfunding equity - all of which have a variety of products under the broad heading. Would it be too confusing for the average person?

The second idea would be standard data that would allow people to judge the risk of companies seeking startup investment. The Funding Circle has a risk rating for those seeking loans. At present 75% of startups fail for many different reasons. “Sophisticated” investors cannot spot the winners from the losers so they diversify their portfolios.

Who would pay for the standards and data analysis?

  • The government - in a recession? But it could form part of a progressive investment package for small business and entrepreneurship.
  • The potential investor - they are already swamped by, and increasingly suspicious of, the fees charged by fund managers. If it was optional then they could pay to see the data and that could prove popular. It could form part of a premium service offered by the platform.
  • The startup of investor - given the likely charge of such a service would entrepreneurs see this as a fair or desired extra charge - especially as it could still not guarantee success. If it was charged to the entrepreneur it could be done so, like the commission, only on the success of a campaign.

Managing Communities of donors and investors

The platforms need to find a way of engaging the wider community beyond donationg to or investing in a project they are personally connected with. There is a highly successful model for this - Kiva -  donors are not personally connected to the entrepreneurs in the global south BUT

Kiva donors, in general, across the world

  • Donate in blocks of $25 through Paypal (fees waived) or via a credit card
  • form interest based or geographical teams who encourage not only team lending but debate on relevant issues
  • are asked to think about a donation to Kiva core costs - the default is 15% but they can pay more or nothing
  • take the hit if the recipient defaults
  • when repayments are made most leave their money in Kiva and donate again

The platforms in discussion with the people who donate and post campaigns could develop such a community of interest around their offer. It engage people through their social motivations - from charity, through community to social investment.

It seems to me that the debate has so far centred around the needs of the platforms and the organisations, entrepreneurs and business who seek to raise money

Not the wider community who make up the crowd


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