Interview with Nesta on crowdfunding

Published on Tuesday, 18 June 2013 13:33
Written by Peter Baeck & Liam Collins

Today we talked to Peter Bæck, Policy Advisor: Public and Social Innovation, and Liam Collins, Policy Advisor: Innovation and Economic Growth at Nesta, about their work on crowdfunding - a way to raise money online.

Govtoday: Hi @PeterBaeck (P) & @liam_p_collins (L). Firstly, tell us a little bit about the projects/work @nesta_uk does.

P: This page gives a good overview of our work on crowdfunding. We do both practical work with platforms, research projects looking in to the different versions of the model and how it works and of course, the directory of crowdfunding platforms in the UK, with platforms, research projects looking in to the different versions of the model and how it works

GT: So for those who haven't seen one before, how does a crowdfunding platform work?

L: Someone seeking funds puts their pitch on the crowdfunding site and has a period of time to get as many people to back them as possible. The 'all or nothing' model most sites operate mean that if the funding target isn't reached the backers get their money back. This shows how the process works.

P: It is really important to distinguish between the different types of crowdfunding platforms and what they offer. In our report we talk about 4 different types of crowdfunding- donation, equity, lending and reward.

GT: What is reward crowdfunding?

P: In return for an upfront contribution, backers get a predefined non financial reward/product in the future. The Pebble watch is a good (and very famous) example of a reward.

GT: Ah, brilliant, so you're buying the product and enabling it to be made?

L:  Yeah, it's a great way of testing ideas and measuring demand before any money gets sunk into a project or debt taken on.

GT: What percentage of people get the funds for their project?

L: It varies by site and model. Kickstarter, the most popular platform, has a success rate of 44%. Some failure is healthy and a good sign that the model is working and the crowd selecting the best ideas.

GT: There have been a few celebrities using crowdfunding recently, Zach Braff and Kristen Bell for example. Does this take away from the start-ups and entrepreneurs using the sites?

P: No. There is no evidence that celebs doing crowdfunding reduces crowdfunding going to small start-ups. If anything, I think it helps raise the profile of crowdfunding

GT: What about if the project never happens, isn't this an element of risk for an investor?

L: Yeah, there is some risk, especially when dealing with novice entrepreneurs. There are lots of examples of projects delivering rewards later than planned but actually very few of projects failing to deliver at all. It's a very transparent process which is an incentive for the entrepreneur to deliver what they've promised and allows them to communicate any delays to backers along the way.

P: In this paper Ethan Mollick points out how 75% of campaigns are delayed.

GT: Could crowdfunding lend itself to replacing small business bank loans?

L: It's a big market so maybe not fully replace but definitely play a big part. Nesta research showed that it could provide as much as £12bn pa in lending to SMEs. Looking at those lending via @FundingCircle, 75% plan to lend more via p2p in the future and 77% of businesses who've borrowed will come to them first for future debt.

@AldermoreBank: Interesting question. It's one of many alternative ways SMEs are using to fund growth. We wrote about it here.

GT: And finally, tell us about the resources Nesta has released to help those looking for funding.

P: In 'Working the Crowd' we give an overview of how the different types of crowdfunding work. Our top 10 1/2 crowdfunding tips is a good first start for entrepreneurs thinking of setting up a campaign. Last but not least crowdingin.com gives an overview of crowdfunding platforms in UK with options to filter by model and sector. 

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