Crowdfunding – Don’t let Recent Hiccups Scare you Away

It would appear that that the crowdfunding industry is currently experiencing a number of difficulties.

At the start of the month it was announced that claims management group Rebus went into administration, less than a year after raising £816,790 via an equity crowdfunding round. This makes it the largest equity crowdfunding failure so far and even more disappointing given the complete lack of comment from management on what went wrong.

Then listeners to Radio 4 heard some highly disparaging remarks from Lord Turner, former Chairman of the FSA, on the peer-to-peer lending industry. One of his most controversial comments was: ‘I strongly suspect that the losses on P2P lending which will emerge within the next 5-10 years will make the worst banks look like absolute lending geniuses…’ His main concerns were over the P2P platforms’ performance of credit analysis, or in his view, lack of it.

But while crowdfunding has received (unfairly in my view) such negative press recently the industry is in fact continuing to grow strongly.

‘While crowdfunding has received negative press recently the industry is in fact continuing to grow strongly’

The recently published UK Alternative Finance Industry Report, compiled by Nesta and the University of Cambridge, suggests that the UK equity crowdfunding market grew by 295% to £332 million in 2015. The industry also saw its first successful exit, with E-Car Club being taken over by Europcar and delivering an estimated return of 3-4 times for investors.

Of course, the recent failure of Rebus has been a blot on the reputation of equity crowdfunding. But in the wider scheme of things it is not really news at all – early stage businesses go bust every day without making it into the headlines. And regarding Lord Turner, his comments have been widely criticised by the industry for being ignorant and ill-informed – incidentally he also has a new book to promote.

What these incidents have made clear however is that if the crowdfunding industry wants to continue to grow, investor education must remain a priority for the fundraising platforms, especially regarding the potential loss of capital.

The more strict risk warnings within the equity crowdfunding industry currently (and quite rightly) state that investors are more likely to lose all of their capital than make a profit in start-up/early stage businesses. This rigorous approach could be more widely adopted in our opinion, and also be made more prominent on equity pitches.  A periodic update on how many pitches have failed on each platform would also help investors to make more informed decisions.

The equity crowdfunding industry is still young, learning and continuing to evolve, so the recent issues should not deter investors from investigating the potential benefits on offer.

‘The equity crowdfunding industry is still young, learning and continuing to evolve, so the recent issues should not deter investors from investigating the potential benefits on offer’

As well as the potential for finding the “next big thing” there are a number of other benefits which can be gained from investing in start-ups. Given their risk profile, equity in start-up firms can be considered to be a separate asset class, thus helping investors to spread their investments and diversify their portfolios. There are intangible benefits too, such as the feeling of satisfaction of being able to help businesses develop their ideas, making new contacts and learning more about investments.

Just in case things turn out badly there are also significant potential tax benefits on offer on most equity crowdfunding pitches (subject to individual circumstances & status). The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), offer respective 50% and 30% income tax relief.

And some significant savings can be made if you are a buyer of the company’s own products. For example, Swiss watch brand Czapek and Cie, which recently raised £682,000 on the Crowd For Angels and Raizers platforms, offered shareholders a substantial discount on their limited edition timepieces. Investors who put in £3,300 or more were able to enjoy a 40% discount. So anyone buying the £18,500 white gold edition of the firm’s Quai des Bergues collection would have saved themselves £7,400 on the recommended sale price – a value 2.2 times their initial investment.

Czapek’s 2016 “Quai des Bergues” collection

Adam Braggs is Managing Director of Crowdnetic, the alternative finance data and connectivity specialists.

www.crowdnetic.com