The alternative finance industry is famed for its transparency. However, to put it mildly, there are certain segments of the space that warrant that reputation, and others that do not. The UK equity crowdfunding industry is undoubtedly a force for good in terms of its capacity for channeling much needed funding into the nation’s startup community. But the sector has come under fire during the past 12 months. Investor protections – in terms of the share classes on offer, gaudy valuations, pre-emption rights, and so on – have caused concern amongst industry observers. Perhaps most often evoked has been the issue of opacity. Tracey McDermott, acting Chief Executive of the FCA,was grilled on the alternative finance sector by the Treasury Select Committee a few weeks ago. Chris Philp MP asked the FCA boss for numbers relating to the losses that have to date been suffered by equity crowdfunding investors. McDermott had no choice but to admit that such data did not exist. Were she asked the same question today, the answer would be different.
AltFi Data this morning unveiled the first serious attempt to ascertain the current status of the 367 companies that have (at some point since the industry’s inception in 2011) received funding from one of the UK’s 5 major equity crowdfunding platforms. The FT covered the report launch, choosing to lead with the headline: “One in five UK crowdfunding investments fail”. The flipside of that, of course, is that 4 do not – and that to me seems the more significant angle.
The gathering of industry participants, commentators and press at this morning’s launch event was welcomed by Sam Robinson, a partner at Nabarro, which supported the report. The audience were then walked through the highlights of the report by AltFi Data Co-Founder Rupert Taylor. These included the following:
Over 80% of the companies that crowdfunded between 2011 and 2013 are still trading.
The cohort of companies funded in 2013 provides the most representative sample for analysis. It contains enough companies (82) to be statistically significant and enough time has passed since funding to allow business plans to have been executed. In this cohort, 22% of the companies have gone on to either raise further funds at a higher valuation or have realized a return for investors via a successful exit. At the other end of the scale 28% of the companies in this cohort have either failed or are showing signs of difficulty.
The portfolio return of the industry since inception, measured as an IRR, amounts to 2.17%. Assuming that SEIS and EIS tax reliefs are fully utilised, that return increases to 33.79%.
AltFi Data sees this report as a significant step forward in allowing the sector to transparently demonstrate both the risks and the returns available from equity crowdfunding.
Establishing a track record for the industry serves two valuable purposes:
It brings credibility and improved profile to this new asset class.
It allows investors to asses the historic investor returns delivered by the sector.
AltFi Data believes that accessing the crowd for finance brings with it an obligation to represent risks accurately by transparently revealing the status of companies that have previously raised money using equity crowdfunding.
In such a way investors can make a better assessment of the risk that they could lose their investment.
I attended the report launch this morning, which was held at the offices of Nabarro. Needless to say, the findings inspired some fairly heated discussion, the highlights of which are summarised below:
One observer suggested that companies that had staged “down rounds” (i.e. taken on investment at a lower valuation) ought to be portrayed in a category that is distinct from “amber”. The amber category currently includes companies that are struggling as well as those that have been through a down round. Rupert Taylor (AltFi Data CEO) issued the reminder that down rounds “unquestionably” represent an impairment of one’s investment.
Mike Baliman questioned the use of the term “IRR”, opining that “model return” might be more appropriate. Baliman was also baffled at the notion that any equity crowdfunding platform would resist adhering to AltFi Data’s proposed norms of conduct. Here Rupert explained that the difficulty is that the responsibility for disclosure rests with both the fundraising company and the platforms, which complicates things. Goncalo de Vasconcelos of SyndicateRoom confirmed that fundraising companies currently have no obligation to disclose performance information to the crowdfunding platforms. Goncalo added strong relationships between platforms and fundraisers helps.
Another point made by Goncalo: how were you able to track privately held (VC or Angel-based) follow on fundraising rounds? Rupert confessed that the only follow on rounds that AltFi Data was able to track were those that took place on equity crowdfunding platforms. In other words, the data could look a lot rosier. It would, however, be extremely difficult to keep tabs on privately held up rounds. Sam Griffiths, MD of AltFi Data, suggested that 58 of the 367 companies that had been tracked appeared to have issued additional equity offline, post their crowdfunding raise. But that data couldn’t be included, as it is difficult to discern the valuation of the company at these rounds with any certainty.
“When will the data reach maturity?” Asked another keen observer. Rupert Taylor offered the opinion that we arguably need see several more years of the report, and perhaps an economic downturn, in order to feel wholly confident in the validity of the data. The amount of uncertainty in the “Where are they now?” report will likely decrease year-on-year, but it will always include some element of approximation.
Another audience member wanted to see the same analysis applied to real estate-based equity crowdfunding, and also suggested that this year’s findings ought to be submitted to the government’s consultation on whether or not to include equity crowdfunding investments within the Innovative Finance ISA.
To end the event, Rupert compared the development of transparency within the peer-to-peer lending space with what may come to pass in equity crowdfunding. Funding Circle, followed by Zopa and RateSetter,published their full loan books as part of their entry into the Liberum AltFi Returns Index (LARI). The industry body – the P2PFA – now requires that all of its member platforms adhere to that same level of disclosure.
When surrounded by operators that go the extra mile to allow their customers every opportunity to make informed decisions, the position of the opaque becomes less and less defensible. In short, transparency breeds transparency.