Why can nobody agree on UK Equity Crowdfunding volumes?
By Rupert Taylor on 18th February 2016
Last week Seedrs made an impressive announcement. It’s worth repeating their exact claim because the wording is important:
“As the UK’s No. 1 equity crowdfunding platform, we are excited to announce that Seedrs has had more than £100 million invested in early-stage and growth focused businesses since it launched in July 2012.”
From reading this claim one could assume that Seedrs have raised £100m via equity crowdfunding. This indeed would be a milestone. The trouble is that we’re not entirely sure that this is accurate.
AltFi Data track all crowdfunding campaigns listed on the top 6 UK crowd funding platforms. In the case of Seedrs that means recording all campaigns that go live on the site. We then watch them reach, or exceed, 100% funding. After a campaign has filled there is a chance that funds are not forthcoming - as due diligence and legals are completed. Given this, we then wait until we can confirm the funds have been raised. If a campaign is successfully funded, and receives the capital, we track it to where the ‘investment amount’ is reported on the company’s individual page on the Seedrs site. In this way we believe that we can record all of Seedrs’ campaigns that have been shown to the crowd and have successfully funded. It is also worth noting that although we track Seedrs’ origination volumes, we stopped publishing them 18 months ago at Seedrs’ request.
Seedrs released the £100m number on the 10th of February. Up to February 4th – the date at which the most recent campaign funded - we can record just £51,333,788 of volume tracked as described above.
When asked, Seedrs told us that we are missing a significant number of their deals. Ben Aronsten, CMO explained “we do a lot of private deals that are never made public on the platform”.
He also explained why:
“We're sorry, but we don't provide public information about those deals because of their nature as private. In many cases there are important confidentiality concerns, and part of why those companies come to us is that they rely on our discretion.”
This justification is completely valid. One of the negatives of equity crowdfunding is that the funding company has to reveal a significant amount about their business to the crowd. This is the reverse of one of the clear positives of equity crowdfunding. Just as consumer-facing companies derive a huge benefit from the publicity that a campaign can bring, together with the brand ambassadors that can be recruited as investors, companies with intellectual property to protect see this publicity as a weakness. Companies with valuable IP to protect may be reluctant to crowdfund for fear of advertising the details of their business plan to rivals.
As such, there is absolutely nothing wrong with Seedrs doing these private rounds. The trouble is that we would argue that it does not fit with any reasonable definition of ‘crowdfunding’. Of the £100million they claim, around £48million would, we think, be more accurately described as ‘angel funded’. The crowd have never seen these rounds.
At this point AltFi Data need to make an admission about the crowdfunded volume totals that we track. We suspect that there is a strong industry bias towards over reporting. Interestingly today’s Alternative Finance Report, published by Cambridge University and Nesta, confirms the lack of certainty. Cambridge-Nesta report that £245m was raised via equity crowdfunding in 2015. Meanwhile we measured 2015 equity crowdfunding volumes, from the biggest 6 UK platforms, at £159m. The Cambridge-Nesta report includes some small platforms that we do not track. We estimate that this would account for no more than £10m of the difference. This reveals a very large discrepancy of £76m between our estimate and that of Cambridge-Nesta. Interestingly the Cambridge-Nesta number is based on an industry survey. i.e. rather than tracking and seeking to independently corroborate volumes the report is based on the number reported by the platforms themselves. The point is that nobody is quite sure.
In fact there have been persistent whispers within the industry about platforms overstating volumes. Accusations range from platforms claiming credit for deals that were not actually done on the platform to platforms counting volume even if funds committed to a campaign never actually make it to the company. AltFi Data have never been able to confirm these whispers, but they refuse to go away.
Criticism was recently leveled at Crowdcube, by both The Sun and the Times newspapers, suggesting that the company has been ‘drip-feeding’ funding from sources other than the ‘crowd’ to create the ‘impression’ of demand for the investment opportunity. Whilst this idea of creating an ‘impression’ of demand is alarming, it is not the issue that we want to address here. What we do recognize, however, is that campaigns often arrive at a crowdfunding site with some demand already secured. This demand may come from sources such as ‘friends and family’ or an angel. But what counts is that it has already been secured. Or more specifically it is investment that has not been raised from ‘the crowd’ on the strength of the appeal of the investment campaign advertised on the site.
Other models explicitly rely on this pre-committed demand – SyndicateRoom for example. AltFi Data have always been strong supporters of SyndicateRoom’s crowdfunding model which uses the assistance of an angel investor to act as an anchor to the deal and to set the price at which the round will clear i.e. the crowd get to invest at the same valuation as has been set by a cornerstone investor who theoretically should understand what represents a fair price. Whilst this model has huge attractions in terms of addressing the complex issue of price discovery, it also adds to the problem of consistent volume reporting. SyndicateRoom would argue that the angel is a key part of their process and should therefore be included in reported volume funded. However we would argue that the angel is not the crowd. In fact the angel is, for volume reporting purposes, similar to any ‘friends and family’ or other pre-committed investment that a company may have secured before the campaign is launched.
Whilst we can confidently describe Crowdcube, Seedrs and SyndicateRoom as the top 3 UK equity crowd funding platforms by origination, we cannot be much more precise than that. But we would not suggest that the problems end there. Whilst all models are subtly different, we observe a systemic inflation of industry reported volumes as a result of the inclusion of investors who should not reasonably be described as representing ‘the crowd’. Either the investor had committed before the campaign was advertised, or the campaign was not advertised to the crowd at all – but to a network of private investors.
In our view this represents a major problem that the industry needs to address. Volume funded is the basis for any analysis of both the benefit to companies seeking access to capital and the return delivered to investors. It is therefore essential that the industry agree a standard methodology for volume reporting. This would allow the establishment of a baseline. We have pointed out in the past that equity crowdfunding investors should establish the failure rate of crowd funded companies as a critical part of their due diligence. However even if they could identify this number it is of little use without accurate context. How much failed out of how much raised? Equally, this would allow comparison of the platforms on a like for like basis. The absence of a like for like standard encourages platforms to out do each other by reporting the highest possible number. Marketplaces thrive on trust. And trust is built on transparency. Standards definitions represent exactly that kind of transparency. How many companies have gone on to deliver a return? How does that compare with the total volumes funded? How does that compare platform to platform? If the equity crowdfunding industry is serious about developing a durable marketplace then it needs to establish a standardised metric for volumes funded.
Equity crowdfunding offers fantastic access to funding for start-up companies and availability to hitherto hard to access investment opportunities for investors. It is unequivocally a positive financial innovation. But in the interests of developing this market place AltFi Data would propose two simple principles to allow for consistent and comparable reporting of industry ‘crowd funding’ volumes. An industry standard metric should only define capital as having been raised by crowd funding if the platform can demonstrate that:
1 – the investment opportunity has been shown to ‘the crowd’
2 –the platform has charged a fee to the underlying investor
We see a fee as providing the simplest way of differentiating between the crowd and investors who were already committed.
We would recommend that the industry encourage standardised reporting on this basis. Each platform can still keep track, and advertise, any other total that they choose. But this would allow observers to gravitate towards a consistent and comparable standard. These metrics would finally allow the industry to confirm what funds have genuinely been raised from the crowd. Without a simple standard like this the industry will continue to leave itself wide open to criticism.