Are we in a crowdfunding bubble that’s about to burst?
Following Rebus' crowdfunding failure, industry experts share their views on whether start-ups and investors should be cautious about crowdfunding
It was recently announced that claims management start-up Rebus had become the UK crowdfunding industry's “largest failure”; having gone into administration following a Crowdcube round where it raised over £800,000 from investors.
While this news made Rebus the UK's largest equity crowdfunding failure to date, it isn't the only start-up to have left its crowdfunding investors out of pocket.
In 2015, UK start-ups Hokkei; a takeaway company, and Upper Street; a shoe brand, raised £320,000 and £243,000 respectively via equity crowdfunding platform Seedrs but both businesses have since gone into liquidation.
These crowdfunding failures represent an important moment for the investment industry as start-ups, investors, and critics consider whether crowdfunding is a sustainable source of start-up finance, whether the benefits outweigh the risks, and ask the biggest question of all – ‘Are we in a crowdfunding bubble?”
What's more, research published last week by Growthdeck found that only nine out of 115 businesses currently seeking investment on UK crowdfunding platforms are in profit; highlighting the many challenges investors face in assessing the strength of investment opportunities.
With all this in mind, we here at Startups Towers thought it was time to look past the recent media hype to find out what those in the industry actually think about the future of crowdfunding. We asked entrepreneurs and experts – including Crowdcube and Angels' Den – to share their views. Here's what they had to say…
“Diligence is overdue”
Chris Maule, CEO and founder of UK Bond Network, believes that some UK crowdfunding platforms have been acting irresponsibly and says that more due diligence is needed and fast:
“Crowdfunding and peer-to-peer (P2P) lending has provided in excess of £2bn to businesses, which means that investors are investing significant sums through P2P platforms. While some of these investors are relatively sophisticated, others will be less so; attracted more by the media frenzy surrounding P2P rather than a thorough assessment of whether it really presents the best investment choice for them.
“Recent crowdfunding scandals have highlighted the consequences of platforms acting irresponsibly and underlined the need for greater regulation of the industry. Encouragingly, this is being taken on board by the FCA, which will conduct a full post-implementation review of its rules for crowdfunding activity this year – it’s expected that P2P will need to comply with similar rules as banks. Investors should be reassured as increased scrutiny improves transparency and standards.”
“Crowdfunding creates investment opportunities that were historically the preserve of VCs”
Luke Lang, co-founder of the UK's “largest” crowdfunding platform Crowdcube, points to figures which show that over 80% of companies that raised crowdfunding between 2011 and 2013 are still trading:
“Businesses, of all stages, are increasingly turning to our sector as a first choice for raising finance, while investors are looking to back interesting companies.
“Whilst the failure of any business is disappointing, not all businesses will succeed like E-Car Club and Camden Town Brewery, and therefore highlights the importance of spreading investment risk with a diversified portfolio.
“However, it is worth noting that a recent report published by Altfi highlighted that crowdfunded businesses are bucking the trend of high failure rates often seen in early stage businesses, with more than 80% of the companies that crowdfunded between 2011 and 2013 still trading. This not only shows the sophistication of the crowd but also our commitment to ensuring transparency and a rigorous due diligence processes, which are spearheaded by an experienced legal and compliance team.
“We are now seeing larger businesses look to crowdfunding, which is creating investment opportunities that were historically the preserve of VCs and institutions. We are also anticipating an increase in series B and C fundraising.”
“There are going to be bumps in the road”
Oli Mochizuki, chief executive and co-founder of crowdfunding platform Fundsurfer, asserts that crowdfunding failures are just part and parcel of start-up investment:
“The type of funding which is used to fund the company going bust should not be the main focus. The equity crowd funding industry is maturing and developing very quickly and there are going to be bumps in the road. Equity crowdfunding is going to see huge future growth meaning more companies will fail but many more will also succeed.
“For both platforms and investors it’s about the right amount of due diligence regarding investment readiness and support. The bigger issue is still access to finance and funding for companies. […] More work is needed to de-mystify alternative finance and that's something we expect to see more of in the near future.”
“It's too easy for bad businesses to raise finance”
Martin Campbell, managing director of financial technology start-up Ormsby Street, thinks there needs to be better regulation of the crowdfunding industry before we see an “almighty crash”:
“There is an elephant in the room with crowdfunding – it’s just too easy for bad businesses to raise funding. I’m not saying that Rebus was a bad business, but I do come across some start-ups that have secured money through crowdfunding and some of those make me think at some stage people are going to lose some serious money.
“In the US, consumers are far more accustomed to playing the stock market and investing their money, but that’s not the case in the UK. Over here, people invest money they can ill afford, and that is far less common in America. There is also a lack of transparency about what can happen to a consumer’s investment – they can lose the lot – and crowdfunding pushes the boundaries of what is legal.
“More regulation would be a good start, but I think that crowdfunding is headed for an almighty crash and to my mind, it isn’t really financial technology (fintech). Fintech should deliver true value to a business or consumer, and that’s not crowdfunding.”
“Crowdfunding has opened up the world of small business finance”
Angels' Den, the UK angel-led crowdfunding platform, believes there is danger of a crowdfunding bubble but thinks that, with adequate education and direction, this can be avoided:
“It is vitally important that we understand and learn from these large industry failures, as we target a more sustainable equity crowdfunding industry. We do not necessarily have to be more cautious in our view of crowdfunding, however this failure raises important questions and places particular scrutiny on the process in which businesses raising finance are vetted and screened by their platforms. Enlisting a lead investor on board can help nurture companies with high growth potential and better ensure that the businesses raising finance are fairly representing all aspects of their company.
“It is widely known that investing in start-ups is risky – but risk is not a bad word, especially when it comes to a balanced portfolio. Failures are part of start-up investment, and the attention they bring will make sure that both investors and start-ups are aware of the inherent risks.
“Crowdfunding has opened up the world of small and medium enterprise financing to the wider public, and has made investing into young businesses a much more viable and streamlined process. However, without the adequate education and direction on part of the investors, there is a danger of a crowdfunding bubble.
P”latforms should be designed to prevent this, with the capacity to equip investors with all the necessary tools to make educated and informed investments.There is a lack of education, experience and direction on the part of the crowd, something that clearly needs to be improved – armchair investors get little direction on how to spot good deals.”
“Crowdfunding platforms need to put forward more robust and profitable businesses”
Gary Robins, co-founder of new crowdfunding platform Growthdeck, says that crowdfunding is a good entry point for individuals to “dip their toes into growth company investing” but says investors need to choose your deals carefully…
“Clearly crowdfunding platforms need to be putting forward more robust and profitable businesses. While crowdfunding is opening up many exciting investment opportunities for more people, a real question mark remains over the underlying value of many businesses that retail investors are backing.
“Although investors may be attracted to invest in businesses where they see significant potential despite a lack of track record, too much exposure to early stage businesses could be a risky strategy. Whilst many of the most successful tech companies were unprofitable at the point of receiving early-stage funding, our finding that such a large proportion of potential investee companies in a wide range of sectors across the board are unprofitable or have no trading history is a concern.”
“With the amount of publicly available facts and figures about many companies seeking crowdfunding pretty thin on the ground, investors are heavily reliant on crowdfunding platforms for their investment information. However, levels of due diligence and the degree of well-informed, impartial insight provided vary greatly from platform to platform.”
“There are going to be some crowdfunding casualties but it will vary sector to sector”
Andrew Gardiner, founder of property crowdfunding platform, Property Moose believes that there are certain areas of crowdfunding that are less “risky” for investors…
“As the crowdfunding sector continues to grow explosively, of course there are going to be some casualties (particularly in business equity funding – most start-ups fail!). There may be naivety among investors because the industry is relatively new and they don’t have much experience investing in early-stage businesses. However we are already seeing new niches appear within the crowdfunding sector that have different risk profiles.
“Property crowdfunding, for example, […] is likely to be dividend producing than a new business, and will hold some value even if the property market crashes. This is a very different proposition to business equity crowdfunding, so when assessing whether we are in a bubble, greater distinction is needed between the wide ranging sectors that fall within the crowdfunding sphere.”
Do you think we're in a crowdfunding bubble? Have you raised crowdfunding or want to invest in a business via a crowdfunding platform?
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