Just weeks ago a startup named ‘Mondo’ became the latest company to smash a new crowdfunding record. Demand to pump cash into the mobile-first challenger bank was so high it crashed Crowdcube’s servers when its campaign to raise £1m was first launched.
A few days later, with some extra computing power in place, it tried again. The full £1m was snapped up in just 96 seconds. The limit was £1,000 per person and it worked out that nearly 19 people a second invested. I logged on after 8 minutes, thinking I’d be early, in reality I missed the boat by a mile.
Contrast that with the fortunes of Pact Coffee – another exciting and innovative startup which looking to raise £1m as well to finance the next stage of its growth. Their story was not quite so successful. After raising less than one-fifth of its £1m target, the Bermondsey based company which lets individuals subscribe to weekly coffee deliveries, pulled its campaign and announced it is to cut 16 jobs. The founder, Stephen Rapoport, insisted the two were unrelated.
Both these events come just weeks after Lord Turner, former head of the Financial Services Authority, warned in February that alternative finance could be set for a big crash in 2016, with investors staring down the barrel of hefty losses. To be clear, nobody in Pact has suffered that fate, and the company has still raised a healthy £5 million from angel investors in just four years.
It is also worth pointing out that the platform, Crowdcube in this instance, doesn’t charge anything when the campaign doesn’t reach its target – so Pact are not in a worse place for having tried and failed. And, as we all know in startup land, that is no bad thing. Moreover, every failed attempt helps the platforms become more intuitive. They do lose out when campaigns aren’t successful, so the more intelligence they gather on what works and what doesn’t will help them provide better advice.
But the fate of Pact and Mondo show why we must be careful not to overreact to crowdfunding failures. Just last month, I wrote for City A.M. that a few high profile stumbles or collapses could be good for the industry.
On current trends, more than £1bn will be invested into businesses through crowdfunding this year, with small firms and startups in particular benefitting from an exciting new way to raise money. As the market matures, and grows in size, it seems only natural that we’ll hear a lot more success stories, as well as some notable losses.
Turner’s fear was based on the, somewhat arrogant, assumption that there is too much ‘dumb’ money in the market – investors who haven’t done their research and want to be part of the hype plough in to startups without knowing, or properly assessing the risk.
Developments over the next few years should go some way to putting those who whinge about dumb money in their place.
For one thing, I expect to see much more segmentation of the investor community – Doctors plugging cash into medtech start, bankers into fintech firms, farmers into agritech. Campaigns will likely be more localised too, Manchester’s footballers with a spare bit of cash perhaps investing into sporting facilities in the North West.
Either way, Mondo and Pact’s varying fortunes show that we shouldn’t be getting too worked up about how intelligent the pounds swilling around crowdfunding are. If this was a bubble, with investors barely reading the name of the company before sticking hard-earned savings into it, then no startup would ever have trouble reaching their funding target, however ambitious it was.
Pact’s stumble shows the market is maturing at a rapid pace and lessons will be learned. Crowdfunding can be an intense marketing campaign for those who decide to try it out. Look at the headlines Mondo secured, and other alternative finance darlings such as the Camden Town Brewery and Just Park, who have used crowdfunding to reach not only investors but customers and brand ambassadors. This is why alternative finance holds such potential for customer-facing businesses. But Pact’s experience should be an eye opener, a warning about the dangers of what happens when it goes wrong. In short, there is no place to hide.
Those who want to protect investors have good intentions. But slapping on rigid limits on individual investments, holding down the maximum amount a company can raise in any one round or introducing new rules about the type of company that can use crowdfunding is not the way forward. Government and regulators must hold off. For now, the market really does know best.