Entrepreneurs are crowding banks and venture capitalists out of the start up market by taking their pitches direct to investors, claims a new report.
Instead, businesses are turning to crowdfunding to raise the cash they need to grow their companies.
Banks are slated for being too expensive and venture capitalists want more than their fair share of a firm in return for their cash, said the report from Stirling and St Andrew’s Universities, Scotland.
The downside is around 40% of entrepreneurs win their crowdfunding cash.
The study looked at 43 companies that sought crowdfunding.
On average, they raised £408,000 by giving away 19% equity to 164 shareholders.
Easier for entrepreneurs
Five of the firms received more than £1 million from investors, and when their statistics are subtracted from the results, the remaining companies raised an average £237,000.
“Banks and venture capitalists also like to see revenue, so if the entrepreneur has no revenue the chance of raising money other than from crowdfunding is slim,” said the report.
“Investors also like the tax breaks that come with crowdfunding.
“The research also found entrepreneurs seeking crowdfunding were not rejected by the banks, but had not bothered asking them for any money because they thought it was a waste of time.”
The report went on to say that entrepreneurs were attracted to crowdfunding because raising money was a quick process.
Tax breaks
“The mix of the ease of raising money and tax breaks has made the British crowdfunding market the fastest growing in the world,” said the study.
The tax breaks include the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), which offer investors relief on the money they stake in startup and growing companies.
The schemes were aimed at encouraging business angels to invest in businesses, but have adapted as attractive benefits for investors staking up to £100,000 in a SEIS company.
SEIS offers a 50% relief against income tax paid, capital gains tax reliefs on entering and exiting an investment and loss relief to offset against other income should the startup fail.
EIS offers similar reliefs against larger investments, but at the lower rate of 30% against income tax and CGT.
