It’s time for crowdfunding to get serious
For crowd fundraises to attract serious investors and businesses looking for more than a publicity stunt, the market needs to get professional
Since the mid-noughties, the crowdfunding market has matured as one of the lauded heroes of the alternative funding market. It has transformed, from rogue-ish disruptor to an established vehicle for investment.
According to Massolution, the total crowd-funding market was worth $5.1bn in 2013 and NESTA estimates that within five years, crowdfunding could provide around £15bn of finance per year in the UK.
Equity crowdfunding is seen as the major driver of this enviable growth with reports of a 95% increase on total funding raised through equity crowdfunding in the first half of this year, which paints a pleasing forecast for the future.
The UK market has now been legitimised. In April this year, the Financial Conduct Authority, introduced a regulation framework and last month, it was revealed that the London Co-Investment Fund, backed by Boris Johnson, will allow crowdfunding platform Crowdcube to manage a portion of £25m worth of taxpayers’ money.
Legitimised, but still unguided
However, 10 years after the first platforms emerged, which marks generations in the tech world, the environment is still far too ‘Wild West’, offering risky options for many investors and small businesses alike.
Crowdfunding is in its nature a risky investment but there has been a tendency for crowdfunding campaigns to hit the headlines for smashing records for the amount of capital raised in the shortest time, or having high-profile backers which helps to drive the media hype around them.
There is absolutely nothing wrong with campaigns such as these raising capital through crowdfunding platforms. Indeed, these types of campaign have been great marketing for the industry in general, raising the flag for democratised investment.
However, not every start-up has a high-profile backer, or ground breaking angle that entices the media. Furthermore, there has been a backlash over recent years, claiming that start-ups have been over-valued and investment opportunities over-hyped.
We should be less concerned with the headlines and more interested in:
- Whether the investment thesis behind these fundraises stacks up
- That sound investment principles and judgement have been applied
- The business plan has had the right level of diligence and challenge
- And that investors are protected and represented appropriately.
The risk could be that companies are increasingly seeing crowdfunding as a marketing campaign in itself, which makes it difficult for the discerning investor – i.e. the investor who is looking to identify which is the real deal and stake a claim to deliver real value for their portfolio.
These investors may try to weigh up whether an investment is valuable through their own research but it is also up to the crowdfunding platforms to offer this level of due diligence.
It is a myth that cash alone will help a business succeed and crowdfunding platforms have at least the opportunity, although we would say a duty of care, to ensure every investment is a sound one.
How crowdfunding must shape up
To offer investment opportunities that demonstrate scalability, potential for growth and profit, and a strong management team is not only hugely beneficial to investors alone. Small businesses looking to raise funds are also often in need of advice and mentorship in structuring their proposition and business plan, so robust analysis of this from the crowdfunding platforms before offering them to investors is a valuable process.
What’s more – there is an opportunity for platforms to actively support a company’s growth strategy after successful fundraising in order to maximise investor returns.
As the market grows, the level of due diligence and professional investment judgement must be applied to de-risk the market for both investors and businesses seeking finance and prepare these businesses for growth.
It simply isn’t enough to see the cash change hands and close the raise. What follows is much more important.
The crowdfunding market is a hugely exciting environment to be working in. It is what attracted us, after nearly 30 years combined experience with major investment firms, to enter this market. But in order to deliver the high-growth companies from the start-ups that use it, it needs to be professionalised.
Investment cannot be based on hype alone, and whilst using a crowdfunding platform can be a vital tool to get initial funding, it will not deliver sustainability in its current form.
The crowdfunding market may have got older and bigger, but needs it needs to get wiser. We must see it must move beyond headline grabbing tactics and flashy marketing campaigns to seek out solid investment opportunities for serious investors, otherwise we risk the credibility of the market as whole.
James Codling and Paul Moravek are co-founders of equity crowdfunding platform VentureFounders