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MBA Entrepreneurs Cash In On Crowdfunding Boom

Crowdfunding is on track to break new records, and fundraising platforms are helping MBA students raise cheap capital for their start-up businesses.

Tue Aug 5 2014

The drone took off from its launch zone in eloquent fashion. Six rotating blades, black as coal, whizzed simultaneously over the snowy peak. Below, a yellow-clad snowboarder began to scale down the mountainous path. A second dare devil boarded closely behind.

A few dozen feet above them, a mounted camera caught every breath-taking moment from a safe altitude. The drone autonomously followed its film stars, controlled with a few swipes across an iPhone screen. It was action sports movie-making at its finest.

For now, this piece of drone design and aeronautic software is a distant dream for the average adventure sports fanatic. But it will soon be available to the masses.

HEXO+ has drummed up significant investment. The company which owns the drone technology, Squadrone System, was founded by a troop of entrepreneurs including Medhi Mugnier, a master’s graduate of Grenoble École de Management, the French business school.

Since launching in February this year, Squadrone System has raised more than $1.3 million in investment funding. Instead of securing venture capital, Medhi has banked on Kickstarter, a crowdfunding platform.

Last month the team behind HEXO+ broke the platform’s investment record. Their venture was backed by 2,336 users, who pledged between $5 and $10,000 or more to the fledgling founders.

The company’s original goal of $50,000 was reached within just a few hours of launching. The California-based firm is backed by Olympic gold medal alpine skier Ted Ligety and Nate Holland, a six-times X-Game gold medallist pro snowboarder.

“One thing we’ve been having a blast doing is interacting with the backers and learning more about what they expect HEXO+ to do,” HEXO+ designers said.

“All of the feedback is a treasure for the project, as it helps us shape our system to backer expectations, and eventually deliver a product that will be awesome to use.”

They plan to use the funding to hire engineers and designers, to take HEXO+ to the next level of usability and roll out the product to the masses.

Users can already pre-order the flying camera, which will be shipped in May 2015. Prices range from $949 to $1,149.

Medhi is one of a growing band of business school entrepreneurs who are cashing in on crowdfunding. Squadrone System was not the only one to break a record in July – growth in peer-to-peer lending through crowdfunding sites reached a new milestone.

Data revealed that platforms such as Zopa, RateSetter and Funding Circle lent out more than £500 million to budding upstarters in the first half of 2014. The figures, from the Peer-to-Peer Finance Association (P2PFA), show that the industry is expanding at a rate of knots. Lending is on track to break the UK record £1 billion mark this year.

More than 66,000 people have opened their wallets on crowdfunding sites, in return for interest rates of about 6%, or equity.

One of the first platforms was Zopa, a site launched in 2005 by the management team that founded internet bank Egg, which ultimate owner Citigroup sold off to the Yorkshire Building Society.

To date, Zopa has dished out over £586 million to more than 80,000 borrowers. The average amount invested through the platform is £5,000.

Any individual can bank funding through Zopa – but other platforms including Funding Circle and ThinCats primarily lend to businesses and start-ups.

On Funding Circle, lending terms span from six months to five years, and investors are charged 1% of the total amount lent – although investors can withdraw funds early.

The benefits to small businesses are obvious: investment capital at cheaper rates than high street lenders and finance houses, while owners retain more of their company’s equity. But investors can still enjoy interest rates that can be as high as 10%.

MBAs, already forking out for tuition and fees at business school, are eager to cash in on this new trend. Instead of self-funding or raising cash from venture capitalists – which have grown something of a negative image in some entrepreneurial circles – graduates are banking on crowdfunding platforms in huge numbers.

Peer-to-peer lending has doubled in the past six months, according to the P2PFA , while business lending continues to grow faster than consumer lending.

Nearly 6,000 businesses raised more than £145 million in new capital in the second quarter of 2014 in the UK, on top of £131 million in the first quarter.

Christine Farnish, chair of the association, said: “Peer-to-peer lending is consolidating its position as a good value and reliable form of funding for credit worthy consumers and small businesses, and more and more consumers are turning to p2p lending as a good way of putting their spare cash to work.”

Globally, the industry is booming. In 2013, $5.1 billion in crowdfunding transactions occurred, according to Massolution, a crowdfunding research and advisory firm. The World Bank predicts that the entire industry could reach $300 billion by 2025.

Corrado Accardi raised £440,000 from over 120 Crowdcube investors, setting a record for the largest amount of crowdfunded equity raised for a UK start-up at the time.

Corrado, who gained an MBA at London Business School, will use the cash to open 12 pizza-outlet-franchises in London over the next five years. “Although I tried to look for investors for the initial plan in 2010, I lacked credibility because I came from the construction sector,” he said.

His business expansion plan may seem ambitious, but the entrepreneur is undeterred: “The reality is that when we start franchising, there are no limits.”

MBAs are attracted to crowdfunding because it offers them the chance to test their idea without taking on a huge financial risk. For tech-based start-ups like Squadrone System, raising large amounts of capital is needed to even launch a prototype product.

Greg Rogers, managing director of Barclays-backed accelerator TechStars, said: “When you take on VC money there comes a price, and that price means all the less money in your pocket for all the more hard work you’ve done.”

TechStars typically provides $118,000 in investment for 7% to 10% of company equity.

Greg’s statement is echoed by James Pattison, CEO of Start Up Direct, which supports UK SMEs. James said: “With platforms such as Crowdcube… A lot of these businesses are raising the funds they require, but giving away less equity than they would with angel investors.”

However, there are risks. Crowdfunding sites are not covered by the Financial Services Compensation Scheme, a fund that guarantees deposits of up to £85,000.

Some platforms, such as Zopa and RateSetter, have safeguard funds in place if companies fail to pay – the latter’s fund is drawn from fees paid by borrowers as part of their loan. But on other crowdfunding sites, if a fledging firm goes bust, investors could lose their entire investment.

The Financial Conduct Authority began regulating peer-to-peer lenders in the UK in April. The watchdog said platforms should hold a high enough level of capital to handle any financial shocks, and they must also have a plan to manage a company’s repayments if it collapses.

This was generally welcomed by the sector and is something that the P2PFA has actively lobbied for in the past.

Christine said that the sector’s growth should be encouraged. “It is however important that all players in this new market operate responsibly. Formal regulation of the sector by the FCA should help ensure that this happens,” she added.