Crowd-funding: Power to the people
Forget bank loans – entrepreneurs are now turning to the 'crowd-funding' industry to borrow cash from their supporters
From electric bikes to cafés, crowd-funding sites are helping female entrepreneurs to get their business ideas off the ground. When Dublin woman Laragh Strahan returned from London in 2007 after training under restaurateur Oliver Peyton, she had a burning ambition to open a chain of cafés of her own.
Under the trade name Lolly and Cooks, Strahan first opened a stall in the George's Arcade Market in Dublin's city centre in 2008, which proved so successful that she was able to open a small coffee shop on Dublin's Upper Merrion Street.
But when it came to her third and most ambitious business venture – opening a major retail until on the Grand Canal – she knew that if she went down the conventional route of bank finance, she would hit the buffers.
"I knew we could get some of the money, but there would be issues getting the full amount we needed, so we were open to alternatives," she says.
Strahan and her business-partner sister have joined a new wave of entrepreneurs turning to the fast-growing crowd-funding industry for finance. She signed up with Ireland's first such company, Linked Finance, which had recently opened up, and within two weeks the loan was fully funded.
"I was surprised at how easy it was. We were, in fact, oversubscribed, which was great and really encouraging for us," Strahan explains. "I would recommend crowd funding to any woman with a business idea where the bank route isn't a viable option – or even when it is.
"It is people helping one another and they have a real sense that they have invested in the business. All going to plan we will open in October."
Linked Finance was started last March by businessman Peter O'Mahony, who also runs Dublin's Laughter Lounge. Already 14 business loans have been fully financed through it. The ambition is to fully fund 200 loans by the year end.
O'Mahony enlisted Simon Deane-Johns – one of the founders of Zopa.com, the originator of online peer-to-peer lending in the UK – as an adviser to his business. Senator Feargal Quinn, Dragon Bobby Kerr and Kingsley Aikins of the Irish Fund, who is chairman of Linked Finance, are also working with him.
"It is the first time that accessing finance has been fast, fair and affordable, because it is not about, 'how do I get access to the decision makers in that bank?' or 'who do I know in that venture capital outfit?'. This is all about proving your worth to your customers and fans, getting them to validate your idea and fund it," O'Mahony says.
"It allows you to test your market, test your pricing, test your features, discover new revenue streams and get vital feedback."
In the UK, Linked Finance's equivalent 'Funding Circle' will lend more than £80m to small businesses this year – the British government has also given them £20m to disseminate to SME's.
Globally, crowd-funding has gone from zero to $3bn in three years, with companies such as Zopa leading the charge.
"Basically, it's where ordinary people with a bit of spare cash lend small amounts to a business they know or like," says O'Mahony. "It allows that business to expand and gives people the satisfaction of having an interest as well as getting a good return on their investment.
"There's €96bn in savings in Ireland at the moment, but most people are afraid to do anything with their money. With crowd funding, you can pledge €100 or €1,000 at, say, an interest rate of 6pc, and if your bid is successful then that's the rate you get."
According to Peter O'Mahony, when it comes to lending, there is a serious gender divide.
"The majority of those who lent money to Lolly and Cooks were female, which was unusual considering just 22pc of Linked Finance's registered lenders are female. In fact, of the €478,630 in total that has been bid, just 11pc has been bid by female lenders – 89pc has been male," he explains.
"We have found that women are far more likely to lend to a female entrepreneur than a male."
O'Mahony also discovered the average woman deposited just €385, while the average man has lodged €796. Women charge on average 7.9pc interest on their loans, while men charge 8.3pc, but women charge female entrepreneurs less – on average 7.5pc interest on their loans – while men charge them more, at 8.7pc.
When it came to her business loan, Julie Wallace, who owns Jule Beauty, encouraged her 30 beauticians to become lenders and effectively become shareholders in the company, which operates a number of high-end beauty and therapy salons in the north Co Dublin and Meath areas.
Wallace, a former executive at household products giant Reckitt Benckiser and Odlums Baking Company, decided to embark on a new direction in her career in 2008. With substantial personal investment and a bank loan, she opened her first 2,500sq ft outlet in Malahide, Dublin, in September 2008. Today, the company operates three outlets and is about to open its fourth, in Dublin's Docklands, Grand Canal Square.
While the banks have supported her in getting to this stage of her development programme, Wallace still believes there is significant reluctance by the financial institutions to progressively support businesses in their development, and it is for this reason that the crowd-funding concept of raising money for investment appealed to her.
"While the banks are technically 'open for business', the conditions that they are applying to sanctioning loans is prohibitive to small business operators," she says.
With the Linked Finance lending model, Wallace has managed to secure investment from the public and her staff to support the opening of her next outlet.
"The whole experience has been significantly less onerous and time consuming than the loan application process with the banks. Moreover, the time frame currently being operated by the bank can run to three months or more," she says.
Having made the initial contact with Linked Finance, they reviewed her financial accounts and business plan, and within four weeks her loan request was oversubscribed by public investors by more than 200pc.
Entrepreneur Lisa Redden and her husband Olivier Van Der Elst started a company called Greenaer five years ago, selling electric cars and bicycles just off Dublin's Pearse Street. They needed €15,000 to expand the business, but had already reached the loan limit with their bank.
"I'd heard about the concept of crowd funding from a friend and thought I'd try it out and see what happened," says Redden.
Within days of their application appearing on Linked Finance, she saw that her customers, and other people who knew her and her husband, were pledging to lend money, not only because they felt some attachment to the business but also because they believed it could give them a good financial return.
The enterprising Greenaer boss has no doubts as to why crowd funding has proved so popular with borrowers and lenders.
Says Redden: "It allows customers to feel they are part of the business, and that's something that's hard to put a price on.
"The PR you get from the process is also invaluable. We would advise anyone thinking of taking the crowd-funding route to go right ahead."