Over the last three years, crowdfunding has quickly established itself as a growing source of capital for entrepreneurs, small businesses and charities. At a time of austerity, it's worth considering how this dynamic funding approach can be used by both the public and private sectors to secure funding for key infrastructure projects. It could give a vital boost to the UK economy in these tough times.
The scale of the opportunity
There are estimated to be around 536 of crowdfunding platforms (CFPs) worldwide. An industry report published by Massolution showed that $1.5bn of crowdfunding was raised worldwide in 2011. In the UK, crowdfunding is small but growing. A report released last month by Nesta shows that crowdfunding accounted for less than £100m of finance provided to businesses, charities, and not-for-profits for projects. They anticipate that with government support it has the potential to expand to a hefty £14.5bn over the next three years.
The most well-known CPF is Kickstarter, who focus on the creative sector, and has raised over $300m for projects. Crowdcube, based in the South-West of England, is an equity-based CFP. It has 24,000 members, with around 30 new businesses attracting over £4m. Collectively, these investments could lead to the creation of 600 new jobs.
How does it work?
The basic premise of the approach is to use crowd power to raise small amounts of money from a large number of individuals, usually over the Internet. There are broadly four categories of crowdfunding models:
- Lending-based funding
- you lend x at a favourable interest rate or interest free and the loan is repaid over time;
- Equity-based funding
- you invest x and expect a financial return if the business does well
- Reward-based funding
- you donate x and in return you get perks and benefits; and
- Donation-based funding
- you donate with no expectation of being compensated, but just because you want to
Crowdfunding has come to champion the underdog and the under-served.
Can it work for infrastructure?
There is no shortage of examples of how crowdfunding has helped the creative industries and entrepreneurs get their ideas off the ground. But, finding successful examples of significant civic infrastructure projects is a rarity. I'm not talking about building skate parks, or doing up the village green, but projects that create new jobs and drive economic development.
However, there are two potentially exciting projects in the pipeline to keep an eye on. The first is in Kansas, USA, on the Neighbor.ly CFP – one of the few CFP's involved in the civic infrastructure projects. They hope to raise a $10m for a 2.2 mile Streetcar (modern light rail) with a project value of $100m. More ambitious is the BD Bacatá, the world's first crowdfunded skyscraper in Bogotá. It's a 66 storey mixed-use commercial and residential building, and has raised over $145m USD of the $240m needed from 3,000 individual investors.
In the Netherlands, €440k is needed to build a wooden pedestrian bridge "Luchtsingel" in the city centre. Closer to home, Spacehive, promote neighbourhood improvement projects on their platform from public art to plugging a funding gap for a community centre in Wales. They are a donation-based CFP, and has successfully raised money from individuals, private companies, councils and charitable trusts.
Why would people invest?
You might wonder whether relying on the goodwill and generosity of citizens is a sustainable approach for funding local infrastructure. Jordan Raynor, co-founder of CFP Citizinvestor, thinks crowdfunding is part of a growing trend towards micro philanthropy. It's the democratisation of philanthropy, now no longer the preserve of the eminently wealthy Getty's or Gates – we can all do it. Richard Godspeed, an urban information blogger, thinks there's a revolution happening in public finance. On his blog, he talks about "a shift away from raising taxes and to sources closer to the direct beneficiaries".
In his recent TEDTalk, Jordan Raynor argues that instead of paying higher taxes people would much prefer to control how their money is spent, even if it means they end up paying more. He references Colorado Springs as an example of this. Back in 2009, the City of Colorado Council was carrying a huge budget deficit, which it proposed to tackle through tax increases of on average $200 per homeowner. It was voted down by city residents; so the council duly followed through on its pledge, and slashed services including turning off a third of its streetlights to save money on electricity. On the instigation of "droves of residents", the council then launched a Street Lighting Adoption programme, where residents could pay to reactivate individual streetlights. The irony is that residents ended up paying more to turn individual lights back on than the original $200 tax hike; which by the way would have also paid for parks, firemen, community centres and swimming pools too.
What is the return on investment?
The investors in BD Bacatá invest in a "FiDi" – which is a type of share that gives each of the 3,000 investors an equity stake in the company and the skyscraper. On the Kansas City streetcar project you get reward: $10 buys you a "thank you" on the website, $25 gets you a mention on the site, and an "I made it happen" sticker. Depending on much you contribute there are: t-shirts, stickers, tote bags, baseball caps, and variable sizes of advertising pixels on offer. On the Luchtsingel bridge, investors pay between €25 for an individual plank and €1,250 for a bridge section; each plank is then inscribed with a personal message chosen from the investor.
Some of the challenges
UK laws are a bit grey on Crowdfunding, but the government has been positive about it, and has committed to working with the industry to support the growth of innovative financing models.
Generally debt and equity investments are regulated so fall within the purview of Financial Services Authority (FSA). But, not many of the equity-based CFPs are regulated by the FSA, but clever CFPs are using legal loopholes to circumnavigate this. If you do invest, you have little or no protection. The FSA advises that crowdfunding should "be targeted at sophisticated investors" but the typical investor tends to put in between £10-200, so not large sums at all. Donation and reward-based CFPs have it much more straightforward.
In Finland, Brickstarter, a civic engagement platform, faced some resistance from the Finnish Authorities. The laws in Finland have not quite caught up with the sudden rise of crowdfunding; with prohibitive legal costs make smaller infrastructure projects unviable.
There is another dimension to consider with a decentralised approach to funding infrastructure. Well-to-do communities that can afford to crowdfund new roads, schools or superfast broadband for their neighbourhoods will do so. Poorer neighbourhoods, often with the most neglected infrastructure and with greater need, will be less able and willing to take advantage of the approach.
Moving it forward
The crowdfunding of infrastructure projects must be driven by councils and other economic development agencies. There are the obvious Planning and permissions needed, which will need the support of elected members, and officers. So councils or Local Enterprise Partnerships with shovel ready projects just sitting on the shelves – there is a potential approach out there worth exploring. The key is getting people to tell you what they want.