* = Article updated in the light of some clarifications and with the addition of a quote from Seedrs.
Last week saw the publication of a report from research company Beauhurst. The research covered equity investments into early stage UK companies - including announced deals, together with some unannounced raises, across the equity crowdfunding, venture capital, private equity and angel space.
Amongst other findings, the report concluded that equity crowdfunding remains in second place, behind PE/VC, in terms of number of deals facilitated. According to Beauhurst, whilst the disruptive new entrant continues to trail the PE/VC sectors, it remains ahead of other traditional sources of early stage funding including angel networks.
The summary above already raises some significant questions. Not least, we question the logic of emphasizing the number of deals over £ deal value as a metric. We also wonder if the incomplete analysis of unannounced deals renders the comparison with angel networks redundant. Because equity crowdfunding deals are more visible than angel funded deals, then without providing a comprehensive list of unannounced deals, which would likely be impossible, it is hard to compare the two in a meaningful way.
Leaving these concerns aside, one would imagine that the broad conclusions would be well received by equity crowdfunding platforms…
‘Further evidence that the new model is disrupting the incumbents!’
‘More evidence of progress for the low cost democratization of start up equity investment!’
As AltFi Data has discovered in our various attempts to encourage equity crowdfunding platforms to develop standardised reporting, this topic is a minefield. AltFi Data’s own measure of Q1 crowdfunding volumes reveals different results both by number of deals and value of deals. Other industry participants also share our confusion. It has since become clear that the inconsistencies between approaches go beyond the reliance on number of deals over value of deals and extend to differences in methodology relating to the way accelerator deployments are counted.
Before going into the numbers, a word on AltFi Data’s equity crowdfunding volume methodology. AltFi Data track all crowdfunding campaigns that appear on the sites of the top 6 UK platforms. We record the volume funded only when crowdfunding sites indicate that a campaign has successfully completed on their public site. As such we only count campaigns that the crowd has been shown, and when we can be confident that a particular amount of funding has been raised. We have consistently adopted this same methodology over the two and a half years that we have collected data and we have applied that same method to the historic figures i.e. prior to when we began collecting data. In this way we hope to capture opportunities that have been shown to the crowd, and where we can have reasonable certainty over the amount of capital that eventually makes it to the company. We then represent these figures on a consistent basis. We acknowledge that this data set could be improved and we continually strive to do so. But, in the absence of an agreed standard, we believe it provides the best possible representation of the public disclosure provided by the platforms. A firm definition of what defines ‘crowd’ remains absent and as such any methodology is imperfect until such a time as that definition can be agreed upon. However we believe that our approach makes the best of an imperfect situation.
The discrepancies between our numbers and those of Beauhurst are down to differences in methodology. We are not seeking to criticise any individual platform. Rather we are highlighting that, in the absence of an agreed standard, inconsistencies can emerge that fuel uncertainty.
The major disparity between our numbers and those of Beauhurst centre on Beauhurst including capital deployed by accelerator firms that were themselves funded by a crowdfunding campaign. The funding in question comes from the accelerator funds Ignite100, Collider and Pi Labs. We tracked the campaigns that funded these accelerators, which all closed in 2015. As such, we would not dispute that these amounts should contribute to any measure of equity capital raised by Seedrs in 2015. However, when the capital was then deployed by the accelerator funds in Q1 it appears to have been counted again. To reflect this as deployment of equity capital credited to the accelerators themselves makes good sense. However, the Beauhurst analysis also credits this deployment to Seedrs.
This is where problems arise. Whilst it is justifiable to count the funds being raised into the accelerator, crediting that to Seedrs, and also being deployed from the accelerator, crediting that to the accelerator, it does not make sense to credit Seedrs a second time on deployment. One pound of deployed equity capital can only be counted once. Whilst one can make a case for crediting the same £ to Seedrs in Q4 when the accelerator was funded, and to the accelerator itself in Q1, when the £ was deployed, it should not be claimed by both Seedrs and the accelerator as Q1 deployment. As such it is misleading to include these deals in Seedrs' Q1 2016 totals either by value or number of deals.
Ignoring capital deployed by these accelerator funds materially changes the platform-by-platform picture for Q1 2016:
Excluding these accelerator fund investments, Crowdcube was in fact the biggest UK platform in Q1 2016 both by number of deals, and by the more meaningful measure of £’s capital raised.
But should we exclude these deals? If the 2015 Beauhurt report did not count that capital to Seedrs when it was raised into the accelerator then we would accept that Seedrs have not in fact been credited twice. But the full methodology, together with Beauhursts’s historic figures, need to be disclosed to confirm this. Equally, if Beauhurst prefer to credit Seedrs as the accelerator deploys the funds, rather than when the funds were raised into the accelerator, then they should not also credit the accelerator on deployment – which unfortunately they seem to do. AltFi Data would argue that it makes more sense to credit the funds to Seedrs when the capital is raised, and to the accelerator when it is deployed. It is possible that both Ignite100 and Seedrs are deploying capital into these companies within the accelerator. But if that is the case more disclosure is required to illustrate how these structures function, and where the capital comes from. At this stage the only thing that is clear is that this has become yet another ‘grey area’.
We approached Seedrs for comment and they said:
“We provide data to Beauhurst which records equity investments into individual accelerator businesses and not the successful raising of the ‘fund’ campaigns on our platform. Funds raised on Seedrs for ‘fund’ campaigns are held in in escrow until we have completed due diligence on the individual businesses that have been accepted in to the accelerator programme, at which point an investment is made directly by Seedrs into the individual business in the same way any other fundraising campaigns do. Some accelerators can and do make their own investments in to individual businesses with a separate pool of funds. There is no double counting because we do not count the campaign as well as the investments in the individual businesses.”
The truth is that there is un-certainty around the calculation of crowd funding volumes across the entire sector. AltFi Data cannot be definitive that any of the numbers that we report for an individual platform is a perfect representation of equity capital raised by ‘the crowd’. This confusion could, and should, be avoided. We remain unequivocal in our conviction that the industry as a whole does itself a disservice by failing to adopt a standard methodology for reporting volumes. Until it does, the temptation to find new ways to flatter the figures will persist. This serves the interests of nobody. It diminishes the credibility of the platforms and the industry. It is a waste of the platforms' energy as they spend time dreaming up ever more flattering ways to boost their own numbers or in policing each other. Worst of all it obstructs meaningful analysis of returns which is essential to the development of investor understanding and the sustainable growth of the asset class. Whilst investors and commentators can attempt to identify what proportion of crowd funded companies have failed, or delivered a realisation, the analysis is rendered useless without a clear understanding of the total amount funded.
Equity crowdfunding should take note of the UK marketplace lending sector. At the debt end of financial disruption the industry has collaborated, with the help of an effective industry body, to develop common definitions and standards of disclosure. The UK equity crowdfunding industry has the opportunity to lead the world in the same way as UK marketplace lending has done. But to do so industry participants have to first bring an end to the volume reporting bun-fight. Platforms should agree on a methodology that ensures that only funds that qualify to an agreed standard can be defined as ‘crowd’ originated. This should adhere to the purest definition of ‘crowd’, i.e. not pre-committed by friends and family, angels, or VC’s, and raised through a campaign on their site. This number can then be compared on a like for like basis between platforms and will allow meaningful analysis of losses and returns. Platforms can continue to report other volume numbers based off any interpretation that they chose that captures all of the other ways that they source funding for companies. But a like for like comparator would bring overdue context to those totals and provide much needed credibility to the marketplace.