Anyone who dares to say anything even remotely critical about the financial revolution of crowdfunding risks being labelled as an unpatriotic, cynical envoy of the big banks.
Celebrity investors from London’s Silicon Roundabout tech hub have been backed up by endless government ministers in asserting that “alternative finance” holds the key to the future of our economy.
Using these systems, ordinary people can either lend money to, or buy shares in, companies that might not be able to access finance through conventional means.
The world’s first crowdfunding investment site was British (Crowdcube), as was the first peer-to-peer lender (Zopa). In the digital age, financial technology is one of the few areas where we Brits excel.
That is all true. But if crowdfunding is to survive, it must be a success for its investors. It is worth asking, therefore, what happens to all that cash ploughed into start-ups by retired teachers, bored accountants and aspiring business angels sitting at home.
It’s been five years since the industry took off. A report last week by AltFi, an independent data company that monitors the sector, claimed that the success rate of companies backed through crowdfunding platforms was “impressive”.
There have been fewer failures than doubters expected. AltFi’s research showed that out of 751 businesses that have raised money on platforms such as Crowdcube or Seedrs, more than 500 are still trading. Almost 90 have gone bust, however, and about 80 appear to be heading in the same direction.
Not failing is not a definition of success, however. The “crowd” providing all that funding quite rightly expects a return. These are high-risk investments. Experienced angel investors probably assume they will lose money on more than half their investments, with the odd jewel from the other half of the portfolio making up the difference.
Yet research by Nesta, a charity that champions innovation, suggests about 60% of the crowd is made up of inexperienced investors. I heard recently about a dustman in Norwich who had used one of these platforms to pump £30 into an app idea thought up by his friend’s daughter.
According to AltFi’s research, there have so far been five “exits” for the British crowdfunding industry.
Three companies funded on the largest platform, Crowdcube, have been sold at a profit.
The report claimed another two, which raised money via the Angels Den site, have also provided exits for their backers. Investors in E-Car Club, an electric car venture sold to Europcar last year, tripled their money. The company grew with £100,000 raised on Crowdcube.
Camden Town Brewery, which raised almost £3m on the same site, was sold to drinks giant AB InBev at a 67% premium last year.
For those who backed knitting retailer Wool and the Gang through its Crowdcube campaign earlier this year, the return was one that would have raised eyebrows in the offline investment world.
The crowd paid 26p a share when it backed the business in a fundraiser that topped £1m. Eight months later, the company reportedly informed its backers via email that it had been acquired by BlueGem Capital Partners in a deal valuing the shares at just over 27p each. The retailer offered to turn the cashback (a profit of about 5%) into knitting vouchers.
Here is where it gets even more interesting. Of the two exits thought to have been made by companies that raised money on Angels Den, which combines traditional angel investing with a crowdfunding platform, AltFi said it had struggled to get any information on returns for investors.
One of these “exits” was for investors who backed Buzzmove, a price comparison site for removal firms. When the London company raised £6m from insurer White Mountains in August, those who had invested via Angels Den a year earlier were bought out, and made a 50% profit. It is important to note that this particular Angels Den investment was raised and completed offline at an old-fashioned pitching event. So it was not really a “crowdfunding” success.
The other investor exit for Angels Den related to a company called Dunfermline Payroll Services, which was reportedly sold last year. But according to Companies House, the business is in liquidation. It transpired that, like Buzzmove, it had also raised its money’offline’.
Angels Den became prickly when confronted with this discovery and said it would be best to avoid saying its network had produced any exits. It asked not to be mentioned in a piece about crowdfunding, suggesting that its business model was different.
Yet it is a member of the UK Crowdfunding Association and took part in the AltFi research.
Note to all crowdfunders: you cannot pick and choose when to be associated with these types of investments. The lack of transparency exhibited here is still standard practice in much of the sector.
It has grown fast in a short time, helping businesses to raise almost £400m to date. The numbers look impressive and the PR campaigns continue to fuel the hype. However, inexperienced investors must learn about what to expect, as there is already proof that they do not always know what they are getting into.
In March last year, London claims management firm Rebus raised more than £800,000 from 109 investors on Crowdcube. Ten months later, it went under, becoming the biggest crowdfunded failure to date. Rebus denied accusations that it might not have shared the extent of its dijculties with the crowd before it asked for money.
The Financial Conduct Authority is considering making it mandatory for crowdfunding sites to publish all the data that AltFi gathers on the sector. In my opinion, that should just be the starting point.