I suspect most people see equity crowdfunding as either a risky waste of cash, or a fun way to punt a few bob. But, in time, its proponents hope it'll be seen as a potentially good long-term investment, enabling small investors to profit by backing private businesses in the UK. One thing holding crowdfunding back is the absence of data on the success or otherwise of such investments. A new report by my colleagues at AltFi.com, with law firm Nabarro, changes that. They've used Companies House records to look at the performance of 431 equity crowdfunding campaigns from 367 companies on platforms Crowdcube, Seedrs, SyndicateRoom, Venture Founders and CrowdBnk. The report covers 2011 to June this year.
The bottom line? A total of £18m was raised on equity crowdfunding platforms between 2011 and 2013. One in five companies who raised money in this period has gone bust (these are small firms after all), and on top of that 20% failure rate, another big group don't seem any closer to a wonderfully profitable exit the AltFi report suggests that only 22% have gone on to raise funds at a higher valuation. Indeed, the researchers reckon the internal rate of return (IRR) on equity crowdfunding investments via the five major platforms since February 2011 averages just 2.17%.
The key findings can be summed up with a traffic light system. Of 116 companies funded between 2011 and 2013, 22 (around 19%) are "red" they've gone bust. Another 19 are "amber" they couldn't be reached by telephone, and there were warning signs, such as late Companies House filings. More promisingly, 43 are "green". They're still trading, but it's not clear whether their value has grown. Meanwhile, 31 are "green plus" they've raised more cash at a higher valuation.
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Julia Groves, founding chair of the UK Crowdfunding Association, called the figures "a bit premature to be meaningful", given that the average firm in the study is just under three years old. It's only once these businesses mature that we'll see the true success of the funding model. I'd like to think she's right, but it comes back to this problem of transparency. Making successful investment decisions requires accurate data on performance, risk and returns and that's all still desperately needed in crowdfunding.
The bad news is that more than a few platforms trumpet the successes but don't shout about the failures. And there's a general lack of detailed "report back" information ie, "where are they now".
What we need is data
Experienced angel investors know that a good 50% of investments in young businesses will be a waste of money. Another 30%-40% might at best return your money. But 10% will be potential ten-baggers. Add back in the tax relief, and you can see why reducing the failure rate from 50% to say 30% would make a big difference to total returns. But to get there we need one last thing some evidence of genuine ten-bagger investments to make up for the myriad losers. On that score, the crowdfunding sector still has much toprove.
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