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The Power of the Crowd

31 March 2016 | Viewpoint
Crowdfunding

Clean technology start-ups are benefitting from a revolution in the speed and ease of raising funding.

 

Pioneering clean technology (“cleantech”) companies can find it more of a struggle to raise investment than their counterparts in other industries. While cleantech resonates with the ethos of many investors, companies in this innovative sector often require longer timeframes and higher capital costs to get to market. Crowdfunding provides one potential solution to this challenge by democratising access to finance, allowing companies to reach a wider pool of investors that can provide quicker and cheaper capital.

The UK is the world’s leading crowdfunding market, with London crowned as its global capital. The market has increased by a factor of 12 in the last 3 years (from £267 million in 2012 to £3.2 billion in 2015), with exceptional growth being experienced in equity crowdfunding (295 percent from 2014 to 2015) and donations (507 percent from 2014 to 2015)[1]. Additionally, the size of the UK market in 2015 is expected to be more than 5 times larger than the crowdfunding market volume projected for the rest of Europe[2].

Despite this incredible growth, the crowdfunding market is still in its infancy. In the UK, only 44 percent of SMEs were aware of alternative financing models and only 9 percent of them used crowdfunding to fundraise in 2014[3]. This is particularly true for the cleantech sector, which accounted for less than 6 percent of funding volumes globally in 2012, with a small percentage of this (only 5 percent) relating to equity funding[4].

This means that enormous potential remains for growth of crowdfunding for cleantech companies, and encouraging we are seeing small companies begin to seize that opportunity. From a recent Carbon Trust survey of around 200 cleantech ventures, only 2 percent had used crowdfunding to date, however 25 percent indicated their interest in seeking finance through a crowdfunding platform over the next 12 months. This nearly equates to the 33 percent considering raising funds from venture capital over the same period. We are not expecting crowdfunding to supplant venture capital or angel funding, but it does show that crowdfunding is a new and powerful funding tool, and it’s starting to make its mark.

There have been some successes. Cleantech crowdfunding has made headline news with E-Car Club (the UK's first entirely electric pay-per-use car club) being the first world equity crowdfunding exit: E-Car Club was sold to Europe Car[5] in 2015 offering more than three time returns for their Crowdcube investors.

Success in raising funds from “the crowd” relies on the ability to generate a positive buzz around an idea and being able to deliver on its potential. Cleantech ventures can harness the desire of the general public to invest in a sustainable and profitable future[6], and so are particularly suited to crowdfunding. Despite the inherent risks, as with any investment, there has never been a better time to use crowdfunding to start, or invest in, a cleantech business or project in the UK. 

 

[1] Pushing boundaries. The 2015 UK Alternative Finance Industry report. NESTA and Cambridge University. http://www.nesta.org.uk/publications/pushing-boundaries-2015-uk-alternative-finance-industry-report

[2] Alternative Finance report, E&Y and Cambridge University https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2015-uk-alternative-finance-benchmarking-report.pdf

[3] Understanding Alternative Finance. The UK Alternative Finance Industry report 2014. NESTA and Cambridge University. http://www.nesta.org.uk/sites/default/files/understanding-alternative-finance-2014.pdf

[4] The crowdfunding industry report. 2013. Massolution   

[5] http://news.europcar.co.uk/the-europcar-lab-takes-majority-stake-in-e-car-club/   

[6] When looking at the motivations for investing in crowdfunding, investors in debt–based securities indicated as “important” or “very important” factors the opportunity to back green/renewable energy products (92%) and to make a positive social impact (86%); and investors in equity crowdfunding indicated as “important” or “very important” the opportunity of doing social or environmental good (46%). Source: Understanding Alternative Finance. The UK Alternative Finance Industry report 2014. http://www.nesta.org.uk/sites/default/files/understanding-alternative-finance-2014.pdf)

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