Crowd control: how Ireland can benefit from a sturdy crowdfunding market

29 Apr 20141 Share

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From October to December last year, the European Commission held a public consultation on crowdfunding, which highlighted issues that need to be resolved for this method of raising funds to flourish in Europe.

Top of the agenda is building trust among consumers, addressing fraud and consumer protection concerns, and keeping track of the legislative approaches adopted by different countries.

Other EU countries have taken steps to regulate crowdfunding or establish legal guidelines, yet Ireland is lagging behind. Although crowdfunding and the legal issues it raises hit upon a wide spectrum of Irish legislation, there is no specific regulatory regime to deal with crowdfunding, said Eoghan Doyle, senior associate at Philip Lee Solicitors.

“The existing legislative framework was not built with crowdfunding in mind," he said.

Legislative opportunities

Crowdfunding is a way to raise funds for a project or venture by asking people (the ‘crowd’) for contributions, typically online.

The gap in legislation presents a pitfall for both platforms and projects. "It also puts Ireland at a disadvantage in terms of encouraging new start-ups in the space and protecting investors," added Doyle.

A legal framework or guidelines would boost mainstream acceptance of crowdfunding, provide certainty to platforms and projects, and enable Ireland to leverage its start-up community.

If Ireland can sell itself as a location for trustworthy crowdfunding, it could attract more businesses and, in turn, create more jobs. One study cited by the European Commission estimates that, in Spain, 7,500 direct ‘crowd-jobs’ were created through some 2,800 successful crowdfunding projects.

Irish legislators can either take action now to establish a more regulated crowdfunding market, or they can wait and see how recently adopted models in countries such as France, the UK and the US pan out.

“The risk with (this approach) is that we lose competitive advantage," said Doyle. "On the flip side, we can obviously learn from any mistakes and adopt a regime in a more mature environment."

It’s hard to say which would be the best approach, as the crowdfunding market is in its infancy both in Ireland and globally.

For Doyle, the key is striking a balance, with minimum disclosure requirements to assess credit risks that don’t over-burden project owners or platforms.

“I believe that some form of vetting is required. As to how far this should go – that’s a tough one," he said. "We need to be careful not to make compliance for platforms and project companies overly expensive or it will kill the potential in this space."

The middleman

A 2013 industry report by Massolution estimated that, in Europe, almost 500,000 projects were financed through crowdfunding in 2012, raising €735m. This marked an increase of 65pc on the total raised in 2011, and the forecast for 2013 was €1bn.

Since the financial crisis, lending activity has reduced and access to finance is more difficult. In this environment, crowdfunding has become a viable alternative for establishing new businesses.

Ireland has no shortage of active crowdfunding platforms, Fund It being perhaps the best-known among them. Business to Arts established the all-island crowdfunding website for creative projects in 2011 and, to date, has hosted 828 completed campaigns, of which 613 have been successful, with total pledges approaching €2.5m.

More than just a facilitator, Fund It has paved the way for crowdfunding in Ireland by educating consumers and campaigners, and establishing a trustworthy environment.

“For us, trying to make crowdfunding as feasible and as risk-free for everyone is something that we’re keen to do," said Andrew Hetherington, project director.

Credibility is crucial to crowdfunding transactions, where pledgers are committing financially to something that may not transpire for months. Though Fund It operates as a middleman in this transaction, Hetherington said it wouldn’t be worth their while to be entirely hands-off when it comes to conflict between the two parties.

“People may not agree on the final outcome or delivery of a project, and it’s part of our reputational risk as a platform that we should be proactive in making sure people deliver rewards," said Hetherington.

Fund It moderates projects on the platform to ensure their viability. This has led to a project success rate of 74pc – far above Kickstarter, one of the biggest names in the crowdfunding game, at 44pc.

Critical to Fund It’s integrity is its ‘all or nothing’ stance on funding. The rationale behind this is simple: if the necessary budget can’t be reached, it’s highly unlikely the project can be delivered as specified and so, no funds are released and everyone is freed from obligation with their cash intact.

A sporting chance

The all-or-nothing approach doesn’t suit all platforms, though, and PledgeSports takes a different approach.

Richard Pearson created this platform to fill a funding gap in sports. "The money at the top end is increasing all the time but, at the other end, it’s still static," said Pearson.

PledgeSports launched in Ireland two months ago and has raised more than €50,000 for equipment, travel expenses, competition entries, and other costs that come with a sports career. Its reach widened to the UK this month and Pearson plans to be live in the US by mid-summer.

Pearson’s platform differs from Fund It in that all funds raised on PledgeSports are given to the athletes, no matter how far off-target. "I wanted to do it in the fairest way possible," he said. "The people who are donating want to see these guys succeed so I don’t think it would sit too well with the fans if we were refunding money."

Like Fund It, PledgeSports retains 8pc of the money raised on the platform to cover maintenance costs. Out of 10 campaigns completed on the site to date, three went above and beyond their target and two more achieved more than half of their target.

Yet setting up a campaign is just the first step and successful crowdfunding requires much more. Publicity is crucial, and social media can play a vital role. What’s more, raising the profile of a campaign does more than just attract donors.

“It’s not just about funding, it’s also a very important marketing tool," said Pearson. "It gives any athlete or team the ability to promote themselves, raise their profile and increase their fanbase, while bringing in money at the same time."

PledgeSports even plans take this marketing angle one step further and become one of the first platforms in the world to bring commercial sponsorship into crowdfunding.

The plan is to entice local businesses – which are already contributing about 25pc of the funding raised on PledgeSports – to sponsor teams and athletes in what would be a positive PR move.

Community chest

From Donegal-born online meal planner Sian’s Plan exceeding its stg£100,000 investment target on Seedrs, to Dublin band Fight Like Apes funding a new album through €20,000 raised on Fund It, to Swords, Dublin-based tennis player James Cluskey raising more than €13,000 for his journey to Wimbledon on PledgeSports, there’s no end to the possibilities crowdfunding can support.

For Philip Martin, a Dublin-based entrepreneur and restaurateur, it was his first choice for funding. "I decided well before the concept of Blanco Niño was even a glimmer in my right eye that my next project after Little Ass Burrito Bar was going to be crowdfunded," he said.

Martin’s plan to build Europe’s first real corn tortilla factory in Ireland raised more than double its stg£60,000 fundraising target on equity crowdfunding site Crowdcube.

A realisation that crowdfunding contributes more than just financial backing fuelled Martin’s decision to source funding in this manner.

“The businesses launching on these platforms weren’t just raising capital, they were raising a community. A community of enthusiastic, influential, like-minded followers that wished to not only support the business by buying its products but by opening doors, providing advice and spreading the good word," said Martin.

Martin now believes he won’t launch another business without crowdfunding in some capacity. That’s not to say he sees it as an easy alternative to conventional start-up financing, though.

"Crowdfunding is a great deal more laborious," he said.

For Martin, the necessary ingredients for crowdfunding success are a great story, a bulletproof business plan, a visually great brand, a polished and inspiring video pitch, and a base of enthusiastic followers. "These are all quite big challenges by themselves, but all essential," he said.

Perhaps buoyed by his recent success, Martin can’t conceive of a market where crowdfunding wouldn’t work. "The underlying fundamentals of what makes crowdfunding work are all part of human nature," he said. "As social creatures, we want to support ideas and people we like. Crowdfunding allows people to do this and get involved in new business ventures and adventures that they believe in."

A version of this article appeared in The Sunday Times on 27 April

Crowdfunding image via Shutterstock

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Elaine Burke is managing editor of Siliconrepublic.com

editorial@siliconrepublic.com