By Lisa Walls-Hester on 3rd May 2016
Investors now have access to a wider variety of investments than at any other time in history; the rise of the alternative finance industry has democratized investment opportunity meaning that unquoted equity is no longer just the preserve of finance professionals and industry insiders.
Not only do we have unprecedented access to investments but the crowdfunding platforms give us the ability to evaluate, question and guide the offers and the entrepreneurs. This open forum is serving to forge an era of investor education and knowledge sharing which some people believe is contributing to the success of the enterprise.
The Altfi 2015 report, Where are they now? reported that over 80 percent of the companies that crowdfunded between 2011 and 2013 are still trading. Of these, many have raised further capital at higher valuations and one has even realised a return for investors. This compares favourably alongside an October 2014 report by the insurer RSA that found that 55 percent of U.K. small and medium-sized enterprises did not survive five years.
Is the survival rate better for crowdfunded companies because the crowd contributes to its success and collaborative decision-making is better at picking a winner or is it too soon to judge?
In his 2004 book, The Wisdom of Crowds, James Surowiecki suggests that a large group of reasonably informed and motivated people is able to make better decisions than a small group of experts.
The book suggests that the median view of members of a crowd is more accurate than all but a handful of individuals and that no individual is able consistently to make decisions superior to those of the crowd.
Surowiecki’s work was published long before crowdfunding was conceived and its findings changed the business community’s understanding of leadership and management processes. However, as the premise emerges that crowdfunded companies are more successful than non-crowdfunded companies should we should we revisit Surowiecki’s findings and examine again why diversity works?
If we agree with Surowiecki’s work and emerging evidence that the crowd is more capable of selecting successful businesses than business angels, venture capital partners (VC’s), and traditional financiers, aren’t entrepreneurs missing a trick if they then forget about the crowd after funding?
When business angels and VC’s invest in a business they usually take a seat on the board. They want to keep an eye on the performance and direction of their investment and more importantly use their contacts, knowledge and experience to advance the business. A pool of crowd investors will likely include some sophisticated investors that have the know-how and contacts useful for the business but there are, thus far, limited tools and processes that leverage this asset.
Adzuna, the jobs search engine, acquired a long list of successful investors from its crowdfunding raise including CEO’s, executives and founders from Capital One, Just Eat, Lovefilm, eBay, PayPal, Paddy Power, Zoopla, Secret Escapes, Wahanda, Interactive Investor, LinkedIn and many others. At the time, Adzuna said it was looking at making use of the expertise and connections of its new investors, but wasn’t sure how they could do it.
Many entrepreneurs know they could and should be exploiting their crowd of investors but have no premise for it and so this resource goes untapped.
If the crowd is comprised of 10-20 investors, communication and information flow would be easy to administer, however if the crowd is made up of hundreds or even thousands of investors then the issue of creating an open and constant dialogue with investors becomes time-consuming and expensive.
Structures or mechanisms for companies to communicate with their crowd investors are emerging, some platforms are providing a 'post-raise' area and there are suggestions in some quarters for a representative of the crowd to be appointed as a director or board observer. The designated crowd director would be charged with the communication flow between crowd investors and the company executives indefinitely.
As the alternative finance industry grows and crowdfunded businesses become more commonplace might we see a new concept emerge, ‘crowddirected’ enterprises?
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.