It seems clear that the equity crowdfunding phenomenon is here to stay in some way shape or form. It looks likely to democratise the funding of start ups just as online trading helped make the quoted stock market accessible to investors who did not have a stockbroker.
Many businesses will receive funding that otherwise would not have managed to raise funding. Venture Capital investors are looking for moonshots, or the much vaunted $1bn “unicorn” exits that will return their whole fund in one exit. They are not typically interested in niche opportunities that may well excite and do perfectly well for an Angel or retail investor. These businesses now have an easier way to reach these investors – which must be a good thing – and some interesting businesses will be created and thrive as a result.
Some VC’s worry that this is creating an excess of seed funded companies, many of whom will fail. Given that the VC industry itself backs plenty of companies that end up failing, this criticism seems – to me at least – to be misplaced. The more seeds that are sewn (sewed?), the more plants, and hopefully oak trees will grow (if you’re still paying attention, you will note that I have but a tenuous grip on matters aboreal).
Some venture funds are turning to these platforms to fill out rounds they are leading which seems sensible to us – funding and consumer marketing in one package. AngelList and Syndicate Room work exclusively on this basis with a lead investor (usually an experienced angel) attracting other retail investors and angels around them, usually in return for a carry fee.
The model we like the most is Syndicate Room, where an investment is put onto the platform only when the company has agreed terms with a lead investor / angel, who invests at exactly the same time and terms as other investors. We have seen a number of investments close on that basis – and we think it is a great way for early stage companies to raise angel funding. This means that an experienced investor has done the groundwork, agreed a deal with the company, will often be the largest investor in the round and is offering the opportunity to invest to others who may otherwise not have either the time,the experience or the capacity to get exposure to these sorts of companies.
Overall, a good thing.
On the downside, we have noticed that valuations for some businesses have been stretched (to say the least) and in some circumstances, we know of companies that have raised money from crowdfunding investors on totally different terms to the other investors (VC’s) investing capital at the same time as those “retail” investors.
Not a good thing.
As ever in investing, it’s a case of investor beware. Or rather, as our friends at Crowdcube would advise, #investaware.
Do we worry that these platforms will put us out of business? We think they will keep all of us on our toes. We need to demonstrate to entrepreneurs that our network, support, experience and input will help them build a better and bigger and more valuable business than taking capital from a large number of individuals, many of whom will not have the time, the inclination or the skills and experience to add value to the company that they want to invest in.
We are certainly up for that challenge.