Exits & Return: The true measurement for equity crowdfunding
By James Codling on 26th February 2016
Equity crowdfunding is a nascent industry and, to date, there have only been a couple of exits from businesses that have raised money through such platforms. As the sector continues to develop and and mature, the truly successful crowdfunded companies that have the potential to flourish will do so, and investors that have backed those businesses will see the consequent returns.
However, this is a risky game and early stage investing is notoriously difficult; there will be failures and inevitably things will not go quite according to plan for the vast majority of businesses that have raised money through the crowd.
As such, over the next three to five years, platforms (like any other investment businesses) will start to be benchmarked on the level of return they have delivered to investors, rather than the pure volume game that is currently driving the industry.
The crowdfunding platforms that will ultimately thrive and grow will be those that can demonstrate a track record of return to investors.
As these platforms gain credibility and traction, they will attract seasoned and practiced investors, who will not be satisfied with insubstantial data when selecting investment opportunities. Consequently, in the future we will see a mounting demand for transparency and readily available data from investors that are looking to make serious investments.
There has been a worrying trend over the last year for more consumer-facing, celebrity-led brands using crowdfunding to push the valuation boundaries, based on the hype that they can generate around their product or service. Many of these investment opportunities appear to fundamentally misprice the risk investors are taking, when proper due diligence is applied.
Over time it may become clear that these opportunities were over-valued and will not deliver an equity like return. Therefore, platforms need to ensure they are presenting realistic, transparent information on the businesses they represent, to allow investors to make an informed decision and avoid a backlash from their investors in the future.
There is already evidence to suggest that regulatory authorities are taking a step towards increasing transparency as they begin to look more closely at regulating the equity crowdfunding industry.
In the past, crowdfunding has been popular with entrepreneurs hoping to get their business ideas off the ground. However, with the evolution of the market, the alternative finance sector holds many promising opportunities for investors. The Angel, VC and crowdfunding markets are beginning to merge and, thankfully, the best opportunities are no longer the preserve of VCs, Angels and the ultra-wealthy.
With the UK alternative finance market currently the largest in Europe, it will become the standard bearer for quality in alternative investments. With the number of exits set to rise, the practises of the platforms representing crowdfunded opportunities will be scrutinised. Through driving excellence in delivering return on investments, the crowdfunding industry will see the market continue to grow in popularity, credibility and value.