From baby steps to blast off - why 2014 will be the year of crowdfunding

2013 was a breakthrough year for crowdfunding. What had started life as a new, if niche, form of investing just a few years previously quickly went mainstream. In just 12 months, Britons pumped nearly £1billion into crowdfunding as a whole, according to the thinktank Nesta.

Nesta now predicts that crowdfunding investment in all its forms will grow by an extraordinary 70% this year.

IFAs, ever the barometer of mainstream investor sentiment, have seen a surge in enquiries about crowdfunding from clients as it became a hot investment topic. As public awareness has grown, many of the more sophisticated investors have added investments made through equity crowdfunding platforms to their investment portfolios.

No magic wand involved

But this was no overnight, Cinderella-style transformation. Crowdfunding has been building momentum steadily ever since it first emerged in the depths of the financial crisis.

Its primary appeal is as strong now as it was then – the possibility to deliver better returns in an age where savings accounts pay pitiful levels of interest.

The triumph of transparency

But what makes crowdfunding stand out from other investment types is its transparency. It is the opposite of a big and anonymous equity fund – as it gives small investors the chance to buy an individual stock they believe in.

This is a level of visibility that the Archbishop of Canterbury may have ruefully noted last year when it emerged that the Church of England had invested – via a fund – in Wonga, the payday lender that the Archbishop had earlier pledged to drive out of business.

Finally, and perhaps most beguilingly, crowdfunding gives investors the chance to make a difference. By buying equity in promising start-ups, crowdfunding investors provide badly-needed finance to some of Britain’s brightest businesses, and in so doing they help UK Plc to thrive.

Crowdfunding 2.0

If crowdfunding came of age in 2013, Nesta predicts it will mature and strengthen in 2014. But it faces both change and potential challenges.

For starters the market it attracts is beginning to stratify. At the top end of the market there are crowdfunding platforms that appeal primarily to the more sophisticated investors. The businesses seeking funding on these platforms are often science or technology plays, producing intangible goods and services.

At the entry level, there are platforms that appeal more to amateur investors. They tend to have a lower minimum investment – sometimes as low as £10 – and often connect investors with more conventional businesses trading in tangible goods.

But just as the market has matured, so have the platforms themselves. New, more sophisticated platforms have emerged that refine and improve the original model. While the first-generation platforms invite people to join a “crowd” of many small investors, second-generation platforms like SyndicateRoom offer them the chance to co-invest alongside professional investors (business angels) who do rigorous due diligence checks on the company in which they are all buying shares.

The road to regulation

The biggest shift in crowdfunding this year is likely to come from without rather than within. The FCA is expected to introduce regulation of the sector in the first half of the year.

A consultation process completed at the end of 2013 hinted that the regulations could be relatively light – after all, crowdfunding does have fans in government who recognise its ability to provide alternative sources of finance to British business.

Crowdfunding’s cheerleaders are urging the FCA to “keep the crowd in crowdfunding” by keeping the minimum investment low, while still ensuring that those who invest fully understand the risks.

Personally I’d like to see crowdfunding limited to investors who fully understand the risks, regardless of their wealth. Whether someone is investing £1,000 or £1 million, they should be fully aware of the risks and rewards involved before being allowed to part with their cash.

Crowdfunding has an elegant, efficient simplicity: it puts people who want to invest their money directly in touch with companies that need funds to grow.

With the banks still paying negligible interest to savers and unable or unwilling to lend to small business, crowdfunding will continue to appeal both to investors and SMEs.

While steering clear of giving recommendations on individual stocks, many IFAs have already begun suggesting that their more active clients include some crowdfunding investments in their portfolio, helping their clients understand the difference between the different platforms and what that means to them as investors.

My hope is that many more advisers will do so now that crowdfunding is becoming mainstream – and that the reassurance of FCA approval will give both them and their clients the impetus they need to join the crowdfunding revolution.