BrewDog and the seeds: crowdfunding and seed investment for new business ventures

As a fan of beer, a company that has attracted my attention of late is the BrewDog, a fast growing independently owned Scottish brewery that specialises in craft beers. I went to one of their bars on Bethnal Green Road a couple of months ago and seem to remember having a good time (though craft beers, as it turns out, can be quite strong and if you treat them like your usual session lager or ale through the course of an afternoon or evening, you’re probably going to get yourself a nice headache the next day).

It wasn’t until more recently, however, that my interest in the company picked up. They’ve made the news this week by getting in trouble with the Advertising Standards Authority (ASA) after describing themselves as “a post-punk apocalyptic mother fu*ker of a craft brewery” on their website. The ASA, in their wisdom, deemed this to be “highly offensive” and have told them to remove this statement. I’ll wait and see how that particular controversy plays out, but you might wonder why a successful and growing company feels the need to come across so confrontational and anti-establishment. Of course, it’s all part of a marketing ploy and is driven by the mentality of their owners/founders (they are Scottish after all). But perhaps, in addition, it has something to do with the unconventional way they have grown and financed themselves as a company.

BrewDog are a recent and powerful example of a company which has managed to bypass traditional forms of funding (via mainstream banks or wealthy individuals) to raise substantial levels of finance through crowdfunding. It is in the process of raising £4 million by making 42,000 shares available to the public at £95 each, which are currently being snapped up by its hops-loving fans. It is something that appears to be happening as part of a wider movement in business finance.

Crowdfunding has experienced massive growth in recent years and is being hailed by many as a welcome and exciting new development in finance – it’s easy to see why. It engages a large number of eager private investors with entrepreneurs, allowing start-up and small firms to access the capital they need to grow and flourish, whilst also introducing more-and-more ordinary people – the “crowd” – to the process of investing and inspiring them to take a more active role in business and entrepreneurship. Some have gone as far as to declare crowdfunding as a key development in creating a new democratic, more transparent form of capitalism. It is being facilitated by a growing number of platforms, which allow investors to provide money to new ventures through debt, equity or other forms of incentives. Some of these online platforms – such as Crowdcube, Seedrs and Abundance Generation – are already responsible for several millions pounds worth of funding to new companies. A new trade body – the UK Crowdfunding Association – was established in March this year to represent the interests of these new organisations and provide the industry with a code of conduct.

At a public policy level, the issue of crowdfunding has been attracting support from those across the political spectrum. Many politicians, who have grown increasingly exasperated at the perceived lack of investment in SMEs by the ‘Big Four’ Banks, are now looking to alternative forms of finance such as peer-to-peer lending and online investment platforms to help UK businesses and kick start the economic recovery. The Government has even introduced a tax incentive scheme – the Seed Enterprise Investment Scheme – to encourage more early stage investment in new firms.

So the question is then, if new financing schemes such as crowdfunding have the support of businesses, investors and politicians, what is stopping them from becoming more and more popular? The simple answer to that is – the regulator.

The Financial Services Authority and its successor, the Financial Conduct Authority, hold a number of deep concerns about crowdfunding and the potential for misconduct to take place. The FSA had said companies who want to use crowdfunding should only target “sophisticated investors” who know how to value start-ups and are aware of the strong likelihood of losing money. The FCA is now looking at the rules around this further and is due to be conducting a consultation exercise in September. At one level, the regulator’s concern is understandable. They do not want a financial scandal occurring on their watch and there are, of course, a number of risks involved when a large number of people start pouring money into new business ventures, which have no guarantee of success. Clearly, there are steps that need to be taken to ensure that crowdfunding is not, as some are predicting, the next financial scandal waiting to happen.

But in my view, it would be a terrible shame if the FCA imposed draconian and restrictive rules on what is an exciting new development in finance. A sensible balance needs to be struck.

Indeed, any rules that suffocate this new form of finance could – like my trip to the BrewDog Bar – result in a terrible hangover for UK entrepreneurs and investors.

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