Equity crowdfunding, Gonçalo de Vasconcelos, says “is beginning to get some bad press — and it’s for a good reason”. Which might not be such a controversial view, were it not for the fact that Mr Vasconcelos is a co-founder of the Cambridge-based Syndicate Room, a fledgeling crowdfunding business.
He points to problems such as “outrageous” valuations, small investors unwittingly getting a different class of share to professional backers and investors being “misled” when online platforms delete negative user comments about companies’ investment pitches, meaning that would-be backers may not be getting the full picture. “I love the concept of letting a much wider group of people invest,” he says, “but the sector needs to be a lot more transparent,”
Mr Vasconcelos launched his company in 2013 because he saw the limitations of crowdfunding, as well as its potential. “You are typically seeing a lot of consumer-based businesses, things like cafés and pizzerias, getting funded. These are things [professional] business angels often won’t invest in because they are not scalable.” Moreover, he says, when start-ups are allowed to dictate valuations, and what class of share a small backer gets, professional investors will stay away or invest only on terms that are unfavourable for the crowd.
Syndicate Room endeavours to be different, allowing crowdfunding backers to invest only when professional investors are also willing to do so — and to guarantee that they get exactly the same terms. “That is critical. On a pound-per-pound basis, you will make or lose the same amount as the person who is putting hundreds of thousands of pounds in. That’s the only way to get a fair game.” Thus the ordinary investor benefits from a professional negotiation and due diligence process, generating a more sensible valuation and terms.
Last year, the crowd-funding industry, which enables ordinary investors to buy stakes in private businesses, helped start-ups and small businesses to raise £84 million. So far Syndicate Room has helped 28 small companies to raise a total of £18.6 milllion. Deals include e-Go, a new kind of lightweight aircraft, supported by ordinary investors each putting in as little as £1,000 alongside the likes of Hermann Hauser, a seasoned entrepreneur and a co-founder of ARM, the microchip designer. Syndicate Room takes a 5 per cent cut of funds raised.
The Financial Conduct Authority has raised similar concerns to Mr Vasconcelos about the equity crowdfunding market, but only in a general sense — and he insists that his call for the regulator to name offenders is not simply a case of wanting to make Syndicate Room alone look good by comparison.
Those with a reputable approach are “not getting any of the upside” they would if they also played fast and loose with the rules , but “all of the downside” in terms of general negative publicity about the sector. He could be accused of adding to that problem, but says it is not his place to disparage any individual rival. Mr Vasconcelos expects Syndicate Room to facilitate £50 million worth of investment this year, but he believes that the whole sector needs to improve its standards if crowdfunding is to realise its potential. “Equity crowdfunding can be a beautiful thing, but it has to be sustainable — and that means investors making money in the medium to long term. Otherwise, it’s just hype and the sector will be dead in three years’ time.”
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