One man’s dream to create a hub for Lego enthusiasts came a step nearer at the end of last week after it raised the £3,000 it needed to launch.

Steve Mayes is now setting up the Brick This Studio in North Shields, a place where people can design and make their own Lego projects and put them on display.

But Mr Mayes raised that cash not through a bank loan or angel investors, but from assorted members of the public attracted to the project through a crowdfunding site.

Lego architect Steve Mayes working with children at South Shields The Word building a scale metro train from Lego
Lego architect Steve Mayes working with children at South Shields The Word building a scale metro train from Lego

Crowdfunding has developed a reputation for helping weird and wonderful projects become a reality. But while creative projects have utilised crowdfunding for some time, more and more North East businesses are turning to the alternative financing system.

Recently the Lakes Distillery carried out one of the region’s most successful crowdfunding campaigns, securing £1.75m towards producing a batch of single malt whisky. The company became the fastest funded distillery on Crowdcube after securing £1m in three days, and raising the larger amount in less than a month.

While the Distillery’s fundraising campaign was undoubtedly a success, not every business gains the same level of support from the public. According to Dianne Sharpe, the CBI’s former North East director and now a much sought-after business consultant, this is because the distillery’s product is more suitable for crowdfunding websites.

“Tynemouth Brewery is another great example of a business that has raised money through crowdfunding,” she said. “Interestingly both of them are businesses that are consumer products and they are businesses that people can really engage with and get attracted to. You can buy into that brand and own 0.001% of a distillery.”

Raising cash is the most obvious benefit of launching a crowdfunding campaign, but many companies who do so also claim they are doing it to give something back to the individuals that have supported them during the early stages of their lifecycle.

This was the case with Newcastle milkshake company Canny, which raised £100,000 in seven days on Crowdcube. The company said it wanted to develop a team of local people who own a part of its business.

While the idea sounds sentimental, it also allowed the milkshake company to develop an engaged customer base who would actively promote the product for free.

For Ms Sharp this is where crowdfunding comes into its own; it offers fantastic marketing opportunities.

NE Director of CBI Dianne Sharp
NE Director of CBI Dianne Sharp

“That’s the real magic of crowdfunding, it works really well for consumer based products and you can build huge marketing momentum around it. You might not get any shares, but for £25 you get a T-shirt or another product. It’s a massive way of creating some real buzz around your product.

“You can get a wider audience and you can get more press coverage, as it’s not just advertising. You can get more advertorial space as there is more chance of the media picking up these types of stories.”

The potential to raise huge sums of money while creating a customer base and marketing a product makes crowdfunding sound like the perfect way to raise money. So why doesn’t everyone do it?

To start with not every crowdfunding campaign is successful, and those that are often do so by gripping the public’s imagination. It’s easy to see why someone might own a share of whisky or milkshake company, but often business-to-business firms are less interesting to the public.

It can be hard to gauge whether a business’s campaign will prove successful. Technology firms, often viewed as the most exciting by the business community, are one example of a sector that does not often perform well on crowdfunding sites. Looking at Kickstarter’s statistics, technology projects have the lowest success rate at only 19.92%.

Websites such as Crowdcube take a slightly different approach to crowdfunding then Kickstarter, and offer people the chance to invest in a company in exchange for equity.

However, having a large number of shareholders can cause a significance amount of red tape within a company due to shareholders having a number of rights. Once such problem can see the publication of company accounts being delayed.

Putting aside these complications crowdfunding might not be the holy grail of crowdfunding that many people think it is. According to Rod Wilkinson, a partner at accountancy firm KPMG’s Newcastle office, traditional financing methods are often more preferable.

“It is not really an alternative to banks,” Rod says. “If people could raise bank finance they would.

“I don’t know their situation but if Lakes Distillery could have raised £1.5m in bank finance at 4-5% per annum, they probably would have.”

He adds: “Crowdfunding is an equity offer, and therefore by doing that the current owners of that business, who are offering that opportunity to invest, are diluting.

“A business would first of all talk to their bank if they are trying to raise money for growth. But many businesses don’t have the cash, profitability or growth to be able to do that.”

With crowdfunding forcing many business owners to give a stake away in their company, it may not be the perfect alternative to bank lending. However, it is filling a gap in the market for small businesses who are often unable to receive loans from banks due to their size. It also helps fill a gap for businesses who only need to raise hundreds of thousands of pounds, rather than millions.

Mrs Sharp said: “There’s a real dearth of opportunities for businesses who don’t want to raise a great deal of money.

“If you want to raise millions there are loads of people out there and there are a lot of people you can talk to. But if you are a start-up or don’t want to raise much money, say £50,000 or £150,000, then there are very few opportunities out there.”

Small businesses are not always about generating huge returns, and this can often mean they do not get the financing they need to get going. While Crowdfunding is often used to grow a business, it can also be used to give something back to the community.

Lego architect Steven Mayes initially wanted to set up the Brick This studio as he needed more space to carry out his work.

But after backers pledged over £3,000 to support the studio, he is now working to turn the office into somewhere Lego lovers can meet to learn how to build intricate models. Without crowdfunding, centres like the Brick This Studio would never come to life.