By Ryan Weeks on 25th November 2016
Angel-led crowdfunder SyndicateRoom publishes new report, reveals strong tailwinds for early stage investment.
SyndicateRoom, the angel-led equity crowdfunding platform, has published a new report entitled “Rise of the Growth Hunters”. The findings show that risk appetite is rising across various demographics of investors, while also showing that early-stage investments are delivering significant outperformance when compared against established equity markets. But the study has also identified an asymmetry between ordinary and high net worth investors in terms of availability of information and investment opportunities.
The report pairs a survey of over 1,000 retail investors with five years of company growth data from Beauhurst. 25 per cent of the investors surveyed allocate wealth to investments, with around 3 per cent allocating over 90 per cent.
According to the study, 39 per cent of individual investors are more willing to take risks now than they were a year ago, compared with 18 per cent of investors who said that they now preferred to take fewer risks. Nearly 50 per cent of retail investors described themselves as “off-track” in meeting their financial goals.
Around two thirds of investors see “the prospect of higher returns” as a key motivation for investing in early-stage equities, with the average retail investor looking to allocate £20k to early-stage investment next year.
The report identified young investors as an important bastion of support for early-stage companies. Young adults (aged 18-30) are likely to have the most diverse portfolios, with 93 per cent of this group favouring a diversification strategy, compared with 67 per cent across all age groups. But crucially 72 per cent of young investors say they will be taking on more risk now than they did a year ago. The study found that young investors would be looking to redeploy an average of £3,500 into early-stage businesses next year.
“In a low-yield environment, compounded by recent macro-uncertainty caused by Brexit and the US election, reliable information on high-growth investment is more important than ever,” said Goncalo de Vasconcelos (pictured above), CEO of SyndicateRoom.
To date, however, the sort of information called for by the SyndicateRoom boss has been scarce.
But the data from Beauhurst paints an encouraging picture for investors. Of the 578 early stage businesses that had received seed or venture equity investment in 2011, just 15 per cent have to date had their valuations written down to zero. But more importantly, the cohort of 578 companies was valued at £1.8 billion in 2011, with an average valuation of £3 million. By September 2016, that same cohort was worth £7.98 billion. An investment of £10k in this particular cohort of early-stage companies in 2011 would now be worth about £45k.
While these figures may seem overly rosy, they are to a certain extent supported by the recent findings of AltFi Data’s second annual “Where are they now?” report, which sought to assess the condition of every company that has ever raised equity money from the crowd in the UK. The report found that 88 per cent of these companies were still trading, and calculated a 19.14 industry-wide IRR, rising to 41.87 when adjusted for SEIS/EIS relief.
But while investor appetite and asset performance look encouraging, SyndicateRoom’s new study has identified a potential stumbling block for aspiring “growth hunters”.
The study reveals that only 9 per cent of retail investors’ capital is available to be redeployed into early-stage firms at present. Barriers to the transfer of wealth, as identified by SyndicateRoom, include the cost of moving capital, the fact that investment opportunities in the field of early-stage equities are limited, and a lack of investment information for those opportunities that are available.
But these problems are much easier to circumvent for what SyndicateRoom terms the "Million Pound Club" – investors with over £1m in disposable income to invest.
These millionaires were in fact found to be more risk-averse than the average investor, and longer-term in their investment style. The headline figure that 39 per cent of investors are going to be taking more risk with their investments next year drops by about a quarter when looking specifically at the million pound club.
And yet members of the club are also 5 per cent more likely to allocate a greater portion of their portfolios to early-stage companies, compared to the average investor. SyndicateRoom attributes the disconnect between appetite and allocation within the two groups to the “millionaires club” having a far greater ease of access to early-stage investment opportunities. The study concludes that those with more than £1m to invest are 15 per cent more likely to be granted access to investment opportunities, and 13 per cent more likely to be given additional information about a fundraising company. This is an imbalance that SyndicateRoom and other platforms like it were built to redress.
”The ultra-wealthy seem to be getting greater access to investment opportunities and better information on the businesses looking for investment,” said Tom Britton, CTO and co-founder of SyndicateRoom. “That is not okay. It is selective disclosure and if equity investment is to shift from large-cap to early-stage companies next year, this needs to change. The growth of the online investment industry can serve as a catalyst to increase transparency and fairness. Since its creation, SyndicateRoom has proudly been a key driver of that ethos, offering equal access and information to all investors.”
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.