Last week, CEO of Seedrs Jeff Lynn sat down with Business Insider to reveal why he believes that minibonds are not as great as they claim to be.
According to the media outlet Lynn laid into minibonds, the debt instruments startups are increasingly turning to when they want to raise cash on crowdfunding platforms like UK-based website Crowdcube. Lynn shared at Fintech Connect conference in London:
“I’m particularly concerned about minibonds because I really think investors are not properly evaluating risk versus returns. The problem with venture debt is that you get all the downside and none of the upside.”
Lynn revealed that he thinks the promise of relatively high returns in an era of record low interest rates is blinding investors to just how risky it is to lend money to a startup:
“The problem is, if it doesn’t work out the bondholders are going to get zero. But if it does work out, all they’re going to get is their principle back and a bit of a coupon. I guess philosophically in this space it’s important for people to be compensated for risk with some upside.”
Lynn also discussed Crowdcube alum, Chilango, and its success so far:
“In the case of a Chilango, it’s established, it’s doing well I’m sure — but it’s still an early stage business, it’s still a long way from being a massive success.”
He then continued:
“I think in some cases, particularly with minibonds, I think they’re being marketed as something a little different to what they are. I would like to see a little bit more focus on making sure we get the financial communications a little bit more accurate. I think that the impression is being created that they’re safer than they are. When people think about debt, think about making a loan to somebody, the instinctive reaction is that this is going to be a pretty safe bet The notion of affinity investing — the notion of giving people the chance to invest in things they like and care about and want to be a part of — is not in itself a bad thing.
“To the extent that people are backing Chilango’s Burrito bond because they like their burritos, that’s not in and of itself a bad thing. Where I get concerned are where the economic terms are so far out of whack with the economic risks.”
In regards to Seedrs’ future with minibonds, Lynn added:
“We’ve stayed away from minibonds and debt instruments generally on the basis that we think it makes much more sense for investors to have full upside. I worry with the minibonds that the long-term returns are going to be disappointing.”