Crowdfunding has been exploding in popularity for both investors and companies in Britain over the last two years.
But we haven't had much concrete data on whether it's a good investment or not.
Industry website AltFi and law firm Nabarro have produced a report looking at the performance of 431 past equity crowdfunding campaigns from 367 companieson platforms Crowdcube, Seedrs, SyndicateRoom, Venture Founders, and CrowdBnk. The report covers 2011 to June of this year.
The results are, well, mixed. The report classifies the companies on a sliding scale from realisation — the company went public or was acquired at a price that gave crowdfunding investors a profit — to red — the company has shut down and investors have lost everything.
Here's what it found:
- 302 companies are "green," which means they're still trading but it's not clear whether the value has increased, thereby increasing the crowds' investment.
- There's only been 1 realisation – E-Car Club, which was acquired by Europcar in 2015. The report says: "Unfortunately exact numbers are impossible to acquire, but the return to the original investors was said to be “around 2.5x."
- 58 companies are "green plus" — they've gone on to raise more cash at a higher valuation. Investors obviously don't get a return from this, but it indicates things are moving in the right direction.
- 29 out of the 367 companies looked at — around 8% — have gone out of business.
- 41 are classified as "amber", which means they couldn't be reached by telephone and there were other warning signs, such as late Companies House filings or an inactive website.
So for the vast majority of crowdfund investments, it's too early to tell. Either side of the majority there's some stand out success and some stand out failure.
If we add together the 29 companies that have gone out of business and the 41 that look like they're going south, that means 70 of the 367 companies have lost, or look likely lost, investors' money — just shy of 20%.
The report's authors say this is actually a pretty low percentage, all things considered. They write:
In the UK, the RSA 2014 study... suggests that 55% of SMEs fail in their first five years of existence. Furthermore, the Nesta 2009 report suggested that 56% of angel investments failed to return capital. Relative to any of those benchmarks, crowdfunded companies seem to be outperforming significantly.
In the 2013 cohort, only 27% of companies are classified as either red or amber. One could argue that companies that have just received a large amount of equity investment should out-perform the average. Equally the sample of companies in this report is older than the RSA study given that the average age at the time of funding is already over 3 years. Notwithstanding these two caveats, we are impressed by these findings.
So when you compare it to the rate of small businesses going bust nationally, those that crowdfund actually look like they perform a bit better.
Once again, though, we'll likely need more time to see if this is actually true — the report found the average company running a crowdfunding campaign was 2.9 years old, so they may well revert to the RSA's "55% within 5 years" finding given time.
But the big question is whether investors on these platforms really understand the risk that their investment could not only be devalued, but they could be wiped out altogether. The report highlights a 2014 report from innovation charity Nesta that found 62% of crowdfunding investors “described themselves as being retail investors with no previous investment experience.”
Angel investors and banks that loan entrepreneurs money to set up businesses are well-versed in likely loss and failure rates. But retail investors are often less os.
The risks were underlined this week when JustPark, a London startup that broke a crowdfunding record on Crowdcube earlier this year by raising £3.7 million. The company's CEO is leaving, a week after staff were laid off.
The AltFi/Nabarro report calls for more transparency from crowdfunding platforms on the performance of past campaigns to help investors understand the risks. It also says more should be done to highlight the risk associated with individual campaigns.
The report concludes:
Accessing the retail investor for funding brings a responsibility to allow the enlightened appraisal of likely return. To achieve this, platforms need to offer maximum transparency both to allow the investor to appraise a specific campaign, but also to identify the success rate of past campaigns. By ensuring that the investors recognise that there is a risk that their principal may not be returned at all, it ensures that the investors only proceed with an investment at a valuation which offers the prospect of a return sufficient to compensate for that risk.
Read more here.
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