It’s time for equity crowdfunding to grow up

By Charles Owen, Founder and Director at CoInvestor

a man with a serious expression

‘Crowdfunding’, the concept of raising a large sum from lots of small individual contributions, has done a great deal of good in the short period of its existence to date. From helping to launch exciting new start-ups to funding critical medical operations, the term is already well-known outside of the traditional investment world.

The use of technology to enable individuals to achieve personal dreams and smaller businesses to raise finance to fund socially beneficial projects or enable them to move to their next level of development can only be seen as a positive step in the democratisation of finance.

But this is just doing what technology does best – making complexity scalable and in doing so empowering individuals into activity that otherwise might be outside of their reach. It has made investing accessible for those who previously might not have had the opportunity to back businesses that they consider could be the next AirBnB or Uber.

What crowdfunding hasn’t yet done is fully unlocked the real complexity of investment activity and taken account of not just the emotional but also the pragmatic necessities around making investments at scale. The vast majority of crowdfunded investment, 90% plus, currently takes place via the lending platforms or Peer to Peer (“P2P”) lenders.

P2P lending has scaled because people inherently understand debt and believe that they can better analyse the risk/return decision. Put simply it’s easier to make a decision when the key information is relatively straight forward; how much I am lending, what is it secured on, when will I get paid back and what interest will I earn?

By contrast, and despite a popular impression of scale, equity crowdfunders are small fry. Making an equity investment is a decision which requires a much more nuanced analysis of the risk of getting your money back – a view on not just the company, but the team behind it, the product they are selling, the market that they are selling into and the competition within that market. Add to that the potential for markets to rapidly adapt, or for unseen competitors to emerge, and then consider the simple statistics around business failure and you start to get a sense of the complexity of making an equity investment decision.

Where it might be relatively easy to make a few small investments in early stage technology businesses using the simple assumption that (i) you can afford to lose your investment, and (ii) one of them might the next Google, this is not sustainable on an uninformed basis over any period of time or with any size of budget.

Hence Equity Crowdfunding now needs to ‘grow up’ and start to deliver to more considered investors the sort of service that they already receive from professionals within the broader financial services industry. Financial planning, investment research and investment management can further help them analyse risk, make a more considered investment decision and, hopefully, increase their chances of making an investment return in the long term.

The high numbers now reaching retirement age combined with the effect of the recent pensions legislation and ongoing capital markets volatility is behind a growing trend for investors to increase the percentage of their portfolios held in alternative assets such as private equity.

We are just at the outset of starting to see sophisticated private investors make the transition to more structured and supportive investment platforms which can fulfil this need. Besides the ability to deliver an online investment process, these platforms will have little in common with the early crowdfunding models.

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