Crowdfunding is music to the ears for small businesses

When Dave Harper and Michael McKnight set up Pop Recs in June 2013, it was only meant to be open for a fortnight. The pop-up record store business, established in a disused tourist information office in Sunderland, was primarily a vehicle for promoting their band Frankie & the Heartstrings. But Harper says Pop Recs soon became a hub for young artists and creatives attracted to its coffee shop, workspaces and gigs. “The problem was, when we first opened, we were only going to be open for two weeks,” says Harper. “We weren’t looking at it with a long-term vision. The making money part was difficult. We were always treading water.”

Pop Recs continued for two more years, attracting major bands such as The Vaccines, Franz Ferdinand, The Charlatans and James Bay to play there. But then its future was suddenly put on hold. “I found out via a Tweet that the council had sold the building. It was also the same day that footage of Franz Ferdinand playing Pop Recs was being used to promote Sunderland as a European City of Culture,” says Harper. “However, when it closed I always said this wasn’t the end.”

Pop Recs searched in vain for an affordable alternative venue, but eventually concluded that without funding it couldn’t survive. So the business decided to set up a campaign on crowdfunding site Kickstarter to raise £6,000 for building work on a new premises.

“We reached our target in four hours, which was mind-blowing. We hadn’t realised the amount of goodwill there was towards us. Within two weeks, we had doubled our target,” says Harper.

At the time of writing, Pop Recs is renovating an old tattoo studio in the city and is weeks away from opening. Those who backed the campaign will have their names adorned on the new walls. Bigger donors will get gifts and free training from Pop Recs. Harper is grateful to all the well-known musicians, such as James Bay, for backing the campaign and their support will help put Sunderland back on the UK music map. “Pop Recs is a necessity in a city like Sunderland, which has so few music venues and is often overlooked. It has to succeed,” says Harper.

Crowdfunding is one of the big hits of the emerging new financial sector. Businesses frustrated by a lack of support from traditional banks have been turning to the wisdom of the crowd for investment instead. There are different forms of crowdfunding: equity, rewards and charitable. A survey (pdf) by Nesta in 2014 found that rewards crowdfunding, such as that carried out by Pop Recs, raised £26m in 2014, a 206% increase on the year before.

“There is a growing movement afoot to revolutionise banking, investing and giving by using technology to simplify the links between those who want to invest money and those who need it,” says Stian Westlake, executive director of policy and research at Nesta. “Crowdfunding and peer-to-peer [P2P] finance are at the vanguard of this movement,” he adds.

The biggest form of crowdfunding is equity-based, which raised £84m in 2014, according to Nesta. But this is dwarfed by the burgeoning P2P market, which enabled businesses to raise £749m last year. With figures on crowdfunding and P2P set to rise, the banks are finding they have serious competition on their doorsteps.

For entrepreneurs such as James Matthews-Paul, founder of Output magazine, it was frustration with the banks that led him to set up a crowdfunding campaign when his business was in jeopardy.

Matthews-Paul created the industry magazine in 2010 and says he found a strong following among its readers in the printing and sign-making industry. However, the company needed money to invest. In particular, it required a new sales person to open up opportunities, “I spent three months writing business plans but we couldn’t get a loan from Barclays,” Matthews-Paul says. “We just needed a small amount of money to make some more, but we couldn’t invest as we didn’t have any collateral. Government lending, which is meant to be going to small businesses, isn’t getting here.”

The business began to run a deficit and Matthews-Paul decided it was time to admit to staff that the magazine might have to close. “I came into the office on the Monday and told the staff that we would have to close on Friday as we couldn’t afford to pay everybody if we carried on.”

He and his team began to brainstorm ideas. It first thought a Kickstarter campaign would be the way forward, but were advised there would not be enough time to hit their target. So with just 48 hours to go, it launched a campaign on Crowdfunder. In order to entice backers it offered them free advertising in the magazine, press releases and shout-outs. Remarkably, the business raised £10,000 in 24 hours and pulled in over £14,000 overall.

“The support we got from the industry we serve was really encouraging. One supplier gave us £2,500 and that took us over the 50% mark, which psychologically was really important. The people at Crowdfunder were great, really supportive. Their CEO made it their pick of the day. We raised £10,000 in 24 hours. I think it was a record,” says Matthews-Paul.

The business is operational again and has hired industry veteran Mary Buck as its sales person. The company says it is now confident in its future and generating stronger revenues. Graeme Roy, head of local innovation at Crowdfunder, says stories like this are becoming more common. He suggests the public are often inclined to step in when the banks will not. “It can also be an alternative for those who’ve struggled with traditional finance and are looking to have one last go at making a success of their ideas, turning to the crowd for the validation they need,” he says. “It’s a real hotbed for businesses that are looking to overcome financial hardships.”

For small businesses struggling to find finance, crowdfunding is a welcome development. However, in the case of emergency crowdfunding there may be some who question whether a struggling business should be saved. Some economists suggest it’s better for struggling businesses to fail and to make way for better ones. However, for analysts such as Westlake at Nesta the failure of British banks to lend adequately to businesses means that crowdfunding is a legitimate response to a significant need.

“Britain still has a problem with small business funding, so it’s good to see more options available. The British banking system has always been more comfortable lending against property than to small businesses,” Westlake says. “If we’re worried about the macroeconomic effect of funders propping up zombie businesses, forbearance by banks is likely to be a much bigger problem.”

Five top tips for crowfunding survivors

If your business is in trouble, follow our guide to saving it with alternative finance:

1 Tell a great story: people need to know who you are, why you set up the business, your failures and successes. Be yourself and don’t hold back

2 Offer great incentives: the best incentives are low cost to you but valuable to your backers

3 Don’t pitch too high: ask for as much as you need, but no more

4 Create a sense of urgency: you want people to act immediately, so explain what happens if they don’t

5 Generate lots of noise: speak to everyone in your network. Use social media and look for champions who will support you

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