I read with interest an article, ‘The trouble with crowdfunding’ passed to me by a colleague who is part of the Food and Drink team here at PKF Francis Clark.
I have long been excited about the potential for crowdfunding to ‘disrupt’ and ‘democratise’ the funding landscape; and to date I see no reason to change my view. However, not all my colleagues share this view, so where I give an opinion in this piece it is very much a personal opinion.
Below I note some of the key facts from The Grocer article, ‘The trouble with crowdfunding’ (24 June).
- 140 UK food and drink businesses have raised money on Crowdcube, with £72 million invested in the sector
- Over 900 companies (many from the food and drink sector) have raised almost £500 million from thousands of investments in the past six years with the lion’s share committed since 2014, according to alternative finance analyst Altfi
- Data from analysts at Beauhurst shows just 1% of the 930 companies to raise money so far have provided an exit route for investors, while 10% are now dead, with another 1% effectively zombies. This compares to with a 10% exit rate and a 7% death rate for businesses backed by VC and PE in the same period
- The Altfi report says crowdfunded businesses have actually performed ‘impressively’ with an average annual paper return of £8.55 for every £1 invested – with a high proportion remaining active.
A number of the criticisms of the equity crowdfunding sector mentioned in the article are valid and concern me, specifically the references to a number of failures of companies who were in financial distress at the time of their raise – this was not flagged to the crowd.
However, I feel a couple of the core issues need to be put into context:
- Valuations – I prepare a lot of business and company share valuations and to be honest I have had ‘issues’ with business owners feeling that their equity crowd raise implicit valuation sets a benchmark for a subsequent business valuation. Two arguably factors I have used to distinguish them: equity crowd raise for a minority stake only and I feel the crowd are not investing purely for the expectation of a financial return i.e. their decision to invest may, in part, be altruistic. The later point was certainly found to be true in a piece of research undertaken by Nesta a few years ago.
- Death and exit rates – I would question how comparable the statistics for crowd against PE/VC truly are if one considers the scale, maturity and ambitions of the business invested. For example, in 2015, 80% of seed deals were crowdfunded, and over 60% of venture deals; the inference of the former is that equity crowdfunding is more prevalent in seed deals than PE/VC, and therefore, maybe it’s not surprising that exit numbers are smaller and death rates are larger? There is also an argument that a PE/VC generally only invests with an exit plan in place and will provide resource (at a cost) to deliver that exit? Whereas, as commented above, the ‘crowd’ may not place the same onus on return on capital? The average Crowdcube investment is £440k – the average for PE/VC in the UK in 2015 according to BVCA statistics was in the region of £7.5million (based on £5,990 million invested in 795 deals).
I am also aware of a couple of initiatives that could enhance the crowdfunding network in the area of ‘management’; a risk factor that could be overlooked by the investor who may be focused on the product or service:
a) Some business angel networks are working with crowdfunding platforms, with the business angels ‘pump priming’ the crowd raise (after presumably getting themselves comfortable on the proposition and agreeing to bolster the management team, if appropriate)
b) Increasing links between crowdfunding platforms and professional/financial support services sector which could open up links for an investee support to have access to business support post a fund raise
To conclude, I would agree that ‘buyer beware’ should flash in big lights over any investment in crowdfunding, but I would hope that sufficient due diligence has been carried out by a platform to pick up on, for example, an impending insolvency, i.e. as a potential investor, I would be willing to accept ‘future risk’ but not be undone by past mismanagement. More failures of the nature outlined in the article could precipitate the death of crowdfunding equity. This will be a great shame as I feel it certainly has its place in the funding matrix, and as Luke Lang from Crowdcube commented in the article, “Crowdfunding has enabled a whole generation of food businesses to exist, and…start to compete with the big boys [through the access to the investor network].”