It's been difficult to garner much substantive data on the equity crowdfunding industry. Reports have often been scanty, or just inaccurate. Evidently, the youth of the industry has meant that samples have not been large enough, or raises not long enough ago, to draw any meaningful conclusions.
But with most of the larger players now at least three years old, things need to change. And a new report, released today by Alt Fi Data, with support from law firm Nabarro, looks set to initiate that. Entitled Where Are They Now?, it provides a thorough overview of how the industry is faring, drilling down into each company that has crowdfunded across the five leading platforms – Crowdcube, Seedrs, Syndicate Room, CrowdBnk and Venture Founders. It tells us several things we didn’t know about the sector, and also makes some weighty recommendations for its players. I take a look, and speak to Sam Griffiths and Rupert Taylor, the founders of Alt Fi Data.
First, the report compellingly refutes some statistics which have become familiar go-tos in regard to crowdfunding – we often hear the “nine out of 10 startups fail” adage, for instance. But the report finds that over 80 per cent of the companies that crowdfunded between 2011 and 2013 are still trading happily.
Second, it shows that the average age of companies that have raised funds from the crowd in 2015 is 3.32 years – far older than the “extremely young startup” narrative suggests. The report also demonstrates how the average age of the companies raising has increased over time on several platforms.
Third, it explores the positive elements of the three largest platforms (“in the hope that people will infer the negatives,” says Taylor), before giving a series of recommendations for the industry – all of which are focused on improving transparency for investors. “Our basic point is that transparency so far has been bad. If you’re opening up access for retail investors, it’s got to be better. The industry hasn’t even agreed on a standard reporting methodology. Platforms are fixated on the fight to deliver the biggest volume number; that’s got to change.” Taylor says that the onus must be on platforms to communicate with companies and ensure that they agree to a certain level of disclosure, so platforms can keep investors updated.
The report calls for platforms to take responsibility for publishing company updates, disclose failures, advertise their track record (i.e the current status of previous campaigns), aggregate company information, properly signal when share classes for the crowd are different to those of management, and try to ensure that any follow-on funding rounds are shown, alongside introducing the much-needed uniform standard for reporting. When it comes to what data the industry publishes about itself, Alt Fi would, at the very least, like to see platforms collaborating on how they report volumes. Even this isn’t as straightforward as you might think, because some platforms have rounds opening to the crowd with investments already made by one or a handful of big investors.
The list may be sensible, but how feasible for platforms would this level of responsibility be? “They’re very good recommendations, but some would be quite a struggle,” says Goncalo de Vasconcelos, co-founder of Syndicate Room. Because most (small) companies don’t have to share financials (and may not, for good reason, want to), the role of platforms – which are often small themselves – becomes quite difficult, he explains. “But there is a middle ground, which is platforms sharing the information they do have – it’s easy to do that. You can show the companies that have raised finance on the platform and whether they’re trading or not, which is a start. Then it’s a case of sharing growth, financial updates.” There have been cases in the past where companies have stopped trading and platforms have simply deleted all record of them.
Of course, providing more company information would be more expensive for platforms – and thus hit investors and companies. And there is also an unanswered question around the legal position of platforms that took on not just more responsibility, but also culpability. But beyond increased investor protection, the long-term benefits could be substantial. Considerably more information on crowdfunded companies would make the possibility of a secondary market more likely. Creating them is notoriously hard for equity platforms, because any buyer is going to want to look thoroughly at the health of a firm – they can’t if only a few sheets of headline figures are available. It would also make an alt fi index, or similar, less of a fantasy – particularly if platforms were willing to work together.
What Griffiths and Taylor are calling for is a code of practice for the industry. “If an industry body does it now, the FCA won’t barge in later. The UK Crowdfunding Association is the ideal body, and this is an opportunity for it to improve its credibility – to take the recommendations and look at implementation,” says Taylor. “This report is the beginning of a returns index for the industry. It’s too early to do anything with it – the data set is not substantial enough – but if platforms paid for a report every six months, it’d cost a fraction of a big marketing campaign and deliver far better returns for them, investors and the industry.”
But perhaps what the industry really needs goes beyond a code of practice which places obligations on platforms. As yet, there is no formalised set of principles that governs the relationship between the companies crowdfunding and investors. This would recognise that the platform is facilitator of that fundamental relationship underlining crowdfunding, and that, to make real strides forward, there needs to be more transparency from all players.
Read the report here.