Equity platform matches business angels with crowd investors – a sign that the venture capital industry is changing fast.
SyndicateRoom is an equity crowdfunding platform that has raised £16 million for 27 start-up companies in the first 18 months of its operation. Its co-founder and chief executive Gonçalo de Vasconcelos stresses to Euromoney its key distinguishing feature.
Most crowd-investing platforms are company-led. An entrepreneur sets up a business plan for a new venture and pitches the idea online to a crowd of potential investors with money to put to work. SyndicateRoom is investor-led. Before any business is pitched to the wider crowd, professional angel investors, including some of the biggest names in a once obscure market segment suddenly popularized in the UK by the BBC television programme Dragon’s Den, first vet the business concept and the valuation.
Only once a recognized angel investor has approved a business plan and invested enough to meet a good proportion of its target funding requirement does a company then have the chance to progress on to the SyndicateRoom platform for crowd investors to subscribe.
“A lot of crowdfunding platforms raise money for local, retail and lifestyle businesses, a coffee shop, a new restaurant, that kind of thing,” says de Vasconcelos. “Whereas business angels tend to concern themselves with much more serious ventures that, while of course risky – and investors must remember that most start-ups fail – might at least have the potential to become very big winners if they do succeed.” The key to our offering is that crowd investors will earn exactly the same as professional business angels that have vetted and backed these companies because they will be investing in the same class of shares and at the same price per share Gonçalo de Vasconcelos, SyndicateRoom.
In mid February, SyndicateRoom was inviting investors to consider backing a medical technology company with a therapy for the treatment of conditions such as acne and non-melanoma skin cancers. Its early backers include Longbow Capital, a specialist in health and well-being. Another company seeking investors offers food producers a check that they will meet strict regulatory standards for mould-borne toxins that are required to export food to the US, EU and Japan. A third is developing an app to ensure safe internet access for pre-school children on the family laptop or tablet.
“The key to our offering is that crowd investors will earn exactly the same as professional business angels that have vetted and backed these companies because they will be investing in the same class of shares and at the same price per share,” says de Vasconcelos. “And that’s vitally important. Because out of every 10 start-up investments you make, it’s likely that four will fail completely, four of the others may keep going but not make any big return, so that leaves just one or two successes that have to pay for all the others.”
It’s quite straightforward to lay out to investors that the obvious risk of investing in the equity of start-up companies is that most fail. But there are big hidden risks for investors even in backing a company that succeeds.
“Investors that have may have spotted and bought into successful companies risk being bitterly disappointed if they only realize too late in the day that they have been sold an inferior class of shares with no pre-emption rights and been diluted down to nothing in undisclosed subsequent funding rounds,” de Vasconcelos says. “Or they may have bought into a company that succeeds but at far too high a valuation in the first place. SyndicateRoom puts the crowd investor on a level footing with the professional business angels.”
It is indeed a dragon’s den out there, not just for hopeful entrepreneurs trying to find backers but also for investors at risk of being caught out by deluded start up entrepreneurs as well as by other investors.
Euromoney sits down with de Vasconcelos just days after the UK’s FCA has released a scathing report criticizing many crowdfunding websites for over-egging the potential gains and downplaying the risks of equity investing. The FCA has warned companies to address this imbalance.
“I am very pleased to say that SyndicateRoom is not one of those that the FCA has had to contact over this,” says de Vasconcelos. “I hope that validates our business model, which, even after a business angel vets a potential new business opportunity and invests in it, also requires SyndicateRoom to do extensive legal due diligence to ensure that the same terms are being offered to our investing members.”
The fact that business angels should ever offer out to the wider market place the chance to back what they have spotted as potential future successes shows how the market place for start-up capital is changing.
“Angel investing used to be a closed club of informal syndicates of professional investors wanting to keep winners for themselves and not risk taking blame from other investors for passing on opportunities that ultimately failed. But that’s changing and opening up now as business angels seek to build their own brands,” says de Vasconcelos. “If a company needs £1 million to get going, a business angel that likes the concept but doesn’t want to risk more than £250,000 can now put it out for others to consider backing. If those other investors are smart and have good questions to ask about the potential demand for the entrepreneur’s product or service, then that can benefit the original angel investor.”
SyndicateRoom puts a time limit for other investors to back start-ups. That speeds the whole process up. At the start, a company could be looking for money for three months on SyndicateRoom. Recently companies have been closing funding in three or four weeks, and de Vasconcelos says that 85% of companies that make it onto the platform get funded.
Past start-ups that have successfully funded include a manufacturer of single-seat aircraft, the maker of a home-monitoring system for relatives of older people and the developer of a new imaging technology that helps surgeons check in real time that they have removed all the cancerous tissue they are targeting and so reduces the need for repeat operations. Further reading Finance: ripe for innovation More fintech profiles.
Since September 2013, SyndicateRoom has funded 27 businesses, none of which has failed. In time that first failure will surely come and more will follow. SyndicateRoom has the web pages ready for the disclosures. Most investors on the platform are sophisticated and high net-worth, putting an average of £15,000 to work.
It’s to be hoped that they realize that if they do pick up 0.25% of the next Facebook, they’ll need plenty more money in reserve to maintain that ownership level through subsequent funding rounds that may get bigger and bigger. The toughest test for SyndicateRoom will be when the first big winner floats or exits and whether or not the backers think they really have made out like dragons.
You can read this article online here, written by Peter Lee