By Will Martin on Thursday 11 June 2015
In 2009 Nesta and UKBAA published Siding with the Angels written by Robert E Wiltbank which looked at the returns made by angel investors in the UK. The report identified some key behavioural traits practiced by successful angel investors-
The report was written before crowdfunding became mainstream but now that it is I wonder if a crowdfunder can possibly be as successful as an angel investor?
Although a crowdfunding investor is looking for big returns, is able to build a diversified portfolio and has the choice to only invest in sectors they have knowledge of, it seems highly unlikely they will be able to copy the other the key behaviours of the successful angel.
A fast moving crowdfunding campaign can be over in a few hours negating the ability of the investor to do 20+ hours of due diligence. In fact the speed of the herd probably masks a number of problems in a deal, for example, an over inflated valuation that is going to make it near enough impossible for any investor to make their “big win,” or a share class that doesn’t give the investor pre-emption investment rights to follow their money and further capitalise on those elusive stars.
The crowdfunder is often limited to the documents posted by the company on a crowdfunding platform and can only question the company via a message board. Angel investors have far more success as they have the opportunity to meet founders face-to-face and have a much deeper understanding of not only the business but the motivations of the team behind it. It’s during these crucial meetings that the angel investor can determine whether they share the the vision of the founders and can offer advice and ongoing active involvement to ensure its success.
The final point I would like to make is that crowdfunding can only be carried out on a crowdfunding platform so crowdfunders are limited to the investment choices curated by the managers of the crowdfunding platforms. Analysis of the platform manager’s performance as angel investors is crucial to the crowdfunder generating any type of positive return.
Crowdfunding is most definitely a highly efficient way for a company to raise money but the process it involves heavily favours the company raising funds and puts the crowdfunder at a significant disadvantage. Only time will tell and it will be fascinating to see the ROI crowdfunders receive from successful crowdfunded companies.