What sort of track record should an investor look for in a crowdfunding platform?

By Rupert Taylor on Friday 23 October 2015

Savings and Investment

This week’s crowdview implores investors not to consider the merits of an investment campaign in isolation….

Earlier this month SyndicateRoom made an announcement that was highly uncharacteristic of the UK equity crowdfunding universe.   As marketing of the sector continues to build it is not just those within this niche financial community, but also the wider public, who have begun to observe the proclamations of exciting investment opportunities leaping out from tube train walls.  Against this backdrop of universally positive presentation the communication that SyndicateRoom sent to all of their customers, and the update they added to their website, represented an unusual note of caution. 

SyndicateRoom wanted to let all of their customers, not just the investors concerned, know that a company that had previously funded on their site had been placed into liquidation. 

Here at AltFi this came as something of a shock.   It is no surprise at all that a company that has been funded on their site has failed.  Young companies fail all of the time.  Indeed an ongoing research project at AltFi Data reveals that a significant number of companies that have crowd funded since 2011 have already failed.  [Note that this report is due for launch on 19th November and the detail is currently under embargo – for more information please contact data@altfi.com]  What is a surprise however is the reaction of the platform.  SyndicateRoom has been totally transparent about this failure.  On top of that they have also reported it promptly. Indeed they have used it to help inform potential investors, releasing a video interview with the companies CEO. 

To our mind this is exactly the correct approach.  Investing in the equity of start-up companies is risky and investors should know as much.  Platforms should ensure investors are aware of this risk and should not be ashamed of advertising this reality which will help their investors to anticipate all possible outcomes. 

In fact looking at past campaigns should form a central part of an investors due diligence.  On top of appraising the merits of any campaign that they might invest in an investor should also consider the success rate of past campaigns.  This serves two useful functions.  First it should give the investor a realistic sense of the likelihood of failure.  As the greed in all of us considers the 300% we could make from the investment we are appraising we must also consider the possibility that the investment could end up being worth zero.  Furthermore by reviewing the performance of companies funded in past campaigns we can get a sense of the success rate that the platform itself has in selecting attractive investment opportunities.  That is not to say it is the platforms fault if a company funded on their platform ultimately goes bust.  This is just an economic reality.  However it is important for investors to get a sense of how successful the platforms screening process is at identifying good campaigns. 

As SyndicateRoom demonstrates there is no shame in having backed a company that ended in insolvency.  This is an un-avoidable fact of business life.   The only shame would be in not allowing investors any means of appraising the likelihood of this outcome.

To that end we believe that the actions of SyndicateRoom represent best practice.   On the occasion of the first of the companies that had funded on their platform failing they have set a precedent that demonstrates that they will be up front about any failures and will seek to allow all of their investors to learn any lessons that might be available.  Company failures should be reported on, promptly, to ensure that investors recognize the risks.

Crowdcube are not far behind in this regard.  They also offer impressive functionality to allow subscribers to track the health of previously funded companies.  Crowdcube maintains a list of most of their funded campaigns with a link to Companies House to show the current status of the company in question.  

So funders – something else to add to your due diligence I am afraid!  Whenever you review a campaign consider the possible payoff in the light of a realistic estimated risk of failure. And a good place to appraise that risk of failure is by reviewing how past campaigns have fared on the platform you are using.  

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