This article featured in The European, during March and April 2015.
An ongoing legacy of financial innovation and a booming tech start-up scene have led to Edinburgh emerging as a centre for equity crowdfunding.
Venture Capital Hub
A European centre of finance since the late seventeenth century, Edinburgh is at the forefront of innovation funding solutions. The city is a hub for business angels – high net worth individuals who provide capital and guidance to early-stage businesses with high growth potentials. There are over a dozen venture capital firms based in the city, including Old College Capital, the venture capital arm of the University of Edinburgh. The UK Green Investment Bank – the world’s first institution created to finance investment in green infrastructure – was founded in Edinburgh in 2012. At a national level, the Scottish Investment Bank operates a range of funds offering equity investments from £20,000 to £2 million on a private sector match funding basis.
The latest alternative finance model to manifest in Edinburgh is equity crowdfunding. Popularised by websites such as Kickstarter – which rose to prominence thanks to quirky campaigns such as erecting a Robocop statue in Detroit – the crowdfunding model sees projects funded by contributions from members of the public. The emergence of equity crowdfunding – wherein unlisted companies raise capital by offering shares to individual investors – has established crowdfunding as a bona fide source of alternative finance.
Although individual investments inevitably carry a considerable level of risk given the high failure rate of early-stage businesses, the relatively small sums involved typically mean that even casual investors can spread risk via a diversified portfolio. Equity crowdfunding is growing in popularity in the UK, with a recent report by the University of Cambridge and NESTA finding that investment rose by 410% between 2012 and 2014.
Part of the growing popularity of equity crowdfunding in the UK can be attributed to the Enterprise Investment Scheme (EIS). Created to incentivise investment in early-stage companies, the EIS provides tax relief for investors purchasing shares in small unquoted firms worth 30% of the investment. The UK has also introduced the Seed Enterprise Investment Scheme (SEIS), which offers tax breaks worth up to 78% on investments in very early-stage companies.
Equity finance remains a relatively little-used source of finance: a 2012 survey by the Scottish Government found that just 1% of businesses in Scotland had made use of equity finance, with businesses favouring more established funding routes such as loans, trade credit and even overdrafts and credit cards. Although equity crowdfunding is unlikely to replace these traditional forms of funding in the immediate future, it is increasingly proving a popular avenue for firms for whom conventional financing options are unsuitable, in particular early-stage technology firms whose risk profile may deter commercial lenders.
Expanding businesses in Edinburgh have been quick to embrace equity crowdfunding as a new source of growth capital. Among the companies who have raised cash using the model are Beer52, the UK’s largest craft beer club; 100% pure fruit jam manufacturer SuperJam; hologram technology start-up Holoxica; multi-award winning pizza delivery company La Favorita Delivered; and Parkure, a University of Edinburgh start-up working to develop a cure for Parkinson’s Disease.
“Crowdfunding is emerging as a model for financing medical research” says Dr Lysimachos Zografos, chief executive of Parkure. “Angels might say no, as the time for a return and the potential for their investment to be diluted are not attractive, so I chose equity crowd-funding, as I believe it is the most honest way to deal with success down the road.”
Crowdcube is the UK’s largest crowdfunding platform, raising £35 million for over 100 businesses last year. Founded in Exeter in 2011, Crowdcube opened satellite offices in London and Edinburgh last year.
“Demand dictated a local presence,” says Craig McKenna, who heads up Crowdcube’s office in Silicon Walk, Edinburgh. “I must have seen 30 or more outstanding businesses in the three months since we opened, all of which we’d be excited to work with.”
Other equity crowdfunding firms in Edinburgh include the technology and healthcare specialist ShareIn and Lending Crowd, which brokers loans between companies and investors.
“We established ShareIn last year to focus on technology and health, with the School of Informatics, the universities and the likes of The Roslin Institute all generating spin-outs and start-ups in the city,” says co-founder Jude Cook. “Equity crowdfunding offers a way to attract investment at much lower cost than traditional equity routes.”
Booming tech sector
Edinburgh’s booming tech sector is home to a host of fast-growing companies in need of growth capital. The sector is fuelled by the city’s six universities and colleges, with the University of Edinburgh ranking second in the UK by volume of spin-outs in a survey by PraxisUnico. Among the tech companies founded in Edinburgh who have gone on to global success are travel search engine Skyscanner, prosthetics developer Touch Bionics and fantasy sports market leader FanDuel.
Thanks to the city’s crop of innovative, ambitious tech start-ups, coupled with an expertise in finance cultivated over more than three centuries, Edinburgh is firmly positioned at the forefront of equity crowdfunding.