Crowdfunding: As risky as we thought?

| Joe Gardiner

 

Writing earlier this week for City AM, Jimmy McLoughlin, Deputy Head of Policy at the Institute of Directors, led with the line: ‘Equity crowdfunding’s success will depend on how we deal with coming business failures’. But while he makes a valid point, the number of UK equity-crowdfunded seed-stage companies failing is actually at an all-time low.

We compared the ‘trouble rate’* of Beauhurst-tracked companies that secured seed-stage equity investment through crowdfunding platforms against those that secured seed-stage equity investment through other non-crowdfunding sources.

 graph2.jpg

This revealed some interesting points.

Companies crowdfunded in 2012 and 2013 are showing a much higher trouble rate than those that were seed funded through other sources. However, companies crowdfunded in 2014 currently show comparable trouble rates with their non-crowdfunded counterparts. And looking at those funded in 2015 – although we must note it is very early to be examining the data on this cohort – we see that crowdfunded companies are actually less likely to be in trouble than their non-crowdfunded counterparts.

This is pretty remarkable stuff; the ‘wild-west’ world of equity crowdfunding seems to have turned on its head. Whisper it, but – according to the data at least – crowdfunding may be turning into a form of fundraising far less risky than anyone could have predicted.

So why are we seeing this trend? Well, the short answer is we don’t know exactly. Arguably, it captures crowdfunding’s teething process. After its early years of finding its feet, it seems the industry has righted the wrongs of its initial practices. Essentially, it has grown up.

Another reason could be due to a growing reputability among platforms; attracting seed-stage companies that would never have considered crowdfunding several years ago. Our Head of Research, Pedro Madeira, says: “Launching an equity crowdfunding campaign has, in the space of five years, gone from carrying a significant level of risk to being a highly professionalised way for companies to receive publicity alongside funding.”

Companies are now presented with a reliable, efficient investment mechanism and can benefit hugely from the inevitable public exposure (and perhaps proof of concept) that any successful crowdfunding campaign brings. Indeed, this exposure increases confidence among VCs, and we are seeing that crowdfunding is increasingly being used to ‘top-up’ institutional rounds; which, in theory, provides an even greater level of investment security.

Of course, we have all seen equity crowdfunded companies fold. Last year, Upper Street closed its doors after raising £244k via Seedrs. The London-based shoe manufacturer parted with 5.7% equity at a pre-money valuation of £3.8m. Liverpool-based Dipstix also bit the dust, as did LumeJet – the photonics tech company that raised £1.54m in exchange for 26.6% equity through CrowdBnk. Future high-profile failures, though, are inevitable, as with any market. (Beauhurst clients can of course see the full details of these through our platform)

Currently, our data suggests that the jury isn’t yet out on whether crowdfunding warrants regulatory changes.  Instead, it seems previous crowdfunding failures have already helped the UK market stabilise.

Want to see all of our crowdfunding data? Take a look at our platform.

Read our full methodology here.

*We use this to mean companies whose official status status is one of the following according to Companies House: Administration Order; Appointment of Liquidator; Company is dissolved; Company Removed; Converted / Closed; Dissolution (First Gazette); Dormant Company; In Administration; In Liquidation; Meeting of Creditors; Strike Off Listed; Voluntary Arrangement; Voluntary Liquidation; Winding Up Order; Winding Up Petition(s) 

 

Get a free tour of the platform.

Book a demo

3d beauhurst laptop