Crowd Becomes Capital

Apologies there is no video this week. 

I’ve been in a hot kitchen (of all the weeks to choose!) helping to revitalise a failing restaurant and just haven’t had the opportunity to film it. Let me know if you miss it and I’ll see what I can do. 

Ownership is changing. 

Last week, I explored a simple but powerful idea. Ownership shapes behaviour.

A century ago, John Spedan Lewis believed the people helping to create value should share more directly in its rewards. Agree with his philosophy or not, it challenged traditional assumptions about who should own businesses and who should benefit from their success. 

This week, I examine a related question. Not who owns the business. But who gets to fund it. 

For most of history, ownership and capital were closely linked. If you wanted to build something meaningful, you generally needed access to somebody wealthy. 

• A bank manager.

• A wealthy family.

• A venture capitalist.

• A private equity firm.

The gatekeepers changed over time but the principle remained the same. 

A relatively small number of people controlled access to capital, and therefore access to opportunity itself. Today, that too is beginning to change. 

The Idea

The democratisation of capital may prove to be one of the most significant economic shifts of our time.

For centuries, investing was largely reserved for those with significant wealth, connections or specialist knowledge. Common people could buy products from companies, work for companies and support companies, but direct participation in their growth was limited.

Crowdfunding challenged that assumption.

Its central question was remarkably simple.

Why should investment opportunities be reserved for a relatively small group of people?

Why should ordinary people be excluded from backing businesses, ideas and projects they believe in, and share in the rewards for doing so? 

As with many shifts, technology provided the answer.

Platforms emerged that allowed thousands of people to contribute relatively small amounts of money towards a shared goal. 

Let’s look at the timeline: 

1999 - The first scalable fractional share investing appears via BuyAndHold.com, allowing investors to buy portions of shares rather than whole shares. 

2000 - ArtistShare launches and becomes widely recognised as the first dedicated crowdfunding platform, allowing fans to fund musicians directly. 

2009 - Kickstarter arrives and crowdfunding enters mainstream consciousness. Kickstarter has provided more than $8bn to over 250,000 projects. 

The rise of the crowd is a subtle but important shift. The crowd is no longer merely the customer. The crowd has become the capital. At first, this was often associated with startups, gadgets and creative projects. Yet the idea spread rapidly. 

• Restaurants.

• Breweries. 

• Renewable energy projects. 

• Property developments. 

• Even burrito makers. 

Almost any venture capable of inspiring belief could potentially attract funding directly from the people who wanted to see it succeed. 

At its heart sits an ethical argument. If opportunity creates wealth, why should access to opportunity be restricted to a relatively small group of investors? 

The Mechanism

As with employee ownership, fairness alone does not explain the success of crowdfunding. The real power lies in storytelling and in the incentives. 

Traditional investors often provide capital and little else. And they are absolutely in it for the money and little else. 

Crowdfunding introduced a different dynamic. Investors became customers. Customers became advocates and communities became marketers. 

A successful crowdfunding campaign often creates far more than funding. It can create momentum. The people backing the project have a vested interest in its success. They talk about it, share it and promote it. 

Ownership, once again, changes behaviour. Or perhaps more accurately, participation changes behaviour. 

I have seen this first hand. Over the years I have been involved with developers, entrepreneurs and founders who explored crowdfunding as a route to growth. My own development company spent considerable time examining the model and used similar funding from the outset. I also spent several years running a regular networking event for one of the founders behind CrowdProperty, giving me a perfectly positioned ringside seat as parts of the sector evolved. 

What fascinated me was not the money being raised. It was the shift in relationships. Historically, raising capital often involved persuading a handful of people. Crowdfunding allowed founders to persuade hundreds or thousands. 

That changes the nature of the game entirely. For smaller operators in particular, the implications were significant. Projects that might once have struggled to secure institutional backing could suddenly find support from communities who understood them, valued them or simply wanted them to exist. 

The crowd became more than a source of funding. It became part of the system itself. 

The Practical Reality

Of course, every revolution encounters reality. And every revolution is bloody. 

Crowdfunding has produced remarkable successes. But it has also produced disappointments.

Capital may become more distributed, but risk remains stubbornly attached. And mum and dad investors are classed as unsophisticated for a reason. 

When funding Chilango through Crowdcube, many investors would have been swayed by the weekly burrito and the idea of the business, possibly more so than by the return itself. It’s not that Chilango was, at the time at least, a bad investment. But Chilango became COVID collateral. And here we find the truth. 

• Not every project succeeds.

• Not every founder delivers.

• Not every investor understands what they are investing in.

There is also an important distinction between ownership and control. A person may own a small piece of a venture yet have virtually no influence over its direction. And democratising access to capital requires a balancing act. Regulators sought to widen participation whilst recognising that early-stage and private investments carry risks many investors may underestimate. Of course, many crowdfunding investors discovered that participation felt very different from power.

This tension became visible in several high profile campaigns, from Chilango to BrewDog. 

BrewDog's Equity for Punks programme is perhaps one of the best known British examples. I explored BrewDog's broader story in a previous article, so I won't repeat it here.

What matters for our purposes here is that the programme demonstrated both the power and complexity of democratised ownership.

Thousands of people were drawn in by the BrewDog story. They became both emotional and invested in the business. But emotional ownership and actual control are not the same thing.

The distinction matters because what people often seek is not merely financial participation. They are seeking agency. A voice. A sense of influence. I discovered this during the collapse of my own company Prosperity Capital. And balancing the expectations of investors is rarely straightforward but especially when reality diverts from the plan.

Human nature remains stubbornly consistent regardless of how ownership is distributed. 

A flawed strategy remains flawed whether funded by one investor or ten thousand. Crowdfunding does not remove the need for governance, leadership or sound decision making, and this rarely comes from the crowd itself. 

Ethics, Incentives and Access

Like employee ownership, crowdfunding appears to sit at the intersection of several powerful ideas. 

Ethics.

A belief that ordinary people should have greater access to investment opportunities.

Incentives.

And an understanding that participation changes behaviour and can create communities around businesses and projects. 

Access.

The removal of traditional barriers between ideas and capital. 

Whether crowdfunding ultimately becomes a dominant force in finance remains to be seen. What interests me right now is the broader trend beneath it. The twentieth century largely democratised consumption. In contrast, the twenty-first century appears to be democratising participation. People no longer want to simply buy products. Increasingly, they want to help build the future. 

• Sometimes as employees. 

• Sometimes as investors. 

• Sometimes as owners. 

The crowd is no longer merely the market. The crowd is becoming part of the system and that may prove to be a far more significant shift than we yet realise. 

Next week, I'll explore the final stage of this journey.

What happens when ownership of anything and everything becomes potentially infinitely divisible? When not only businesses, but buildings and physical assets can be owned fractionally by thousands of people. 

If employee ownership changed who could own businesses, and crowdfunding changed who could fund them, the next question becomes obvious.

Who gets to own the world around us?

Musical Easter Eggs above

“time” – Time, by David Bowie 

“Common people” – Common People, by Pulp

“in it for the money” – Only In It For The Money, by Jimmy Smith and Dr John

“emotional” – Jóga, by Björk