Investing in startup companies is a risky endeavor. Now I believe that risk capital should be a part of anyone’s portfolio but a decision to dedicate money to a promising business, with enthusiastic entrepreneurs at the helm, is no guarantee of success. This is a good thing though, as through trial and error winners eventually emerge. Some grow to be successful operations, some become mega-hits and some fail. Most investment crowdfunding platforms today advocate a diversified portfolio strategy somewhat similar to a VC approach.
Seedmatch, a leading German crowdfunding platform, has always taken transparency quite seriously. In a posting last December, Seedmatch tallied their crowdfunding successes to date. But more interestingly they shared the ones that had gone bust too.
There are more than a few companies that have raised capital via crowdfunding that have gone on to fail leaving investors with little. Deutsch Bank published a report on this phenomena last year stating that in Germany, by the end of 2013, there were 116 successful investment crowdfunding raises with 7 insolvencies. Seedmatch should be applauded for their efforts in reporting the good alongside the bad. It is a truism that a transparent market boosts investor confidence. It is one that hides in the shadows that should be concern for all.
According to Seedmatch that as of December;
“Since 1 August 2011, 72 funding rounds were conducted of 61 startups over Seedmatch. About half of the young startup companies have already received a follow-on financing following a crowdfunding round – whether through venture capital and other institutional investors, angel investors or strategic investors or the crowd. Regardless this positive balance faces five business failures: betandsleep , which had to stop business operations due to a lack of follow-on financing in August 2013, followed by BluePatent GmbH in February 2014, foodieSquare in March 2014, PADS FOR YOU and goodz in July 2014.”
This statement was made on the eve of another company that was considering insolvency: Vibewrite, a company that raised more than € 500,000 from over 550 investors. Seedmatch does good service to future investors by setting expectations and making them aware of the risk involved.
Risk is intrinsic to any investment. The riskier investments are paired with potentially higher returns. Each and every investor who makes a personal decision to back a young company is (or should be) aware of this fact. What crowdfunding delivers is the opportunity for anyone to participate in early stage companies paired with a more transparent financing process. And perhaps some crowd-wisdom along the way.
While it is never enjoyable to wallow in ones failures most of us are fortunate enough to live in a culture that embraces innovation and acknowledges failure is a needed part of the process.
As Dara Albright wisely commented on these pages;
“Betting on a company’s success or failure is the very premise of investing. In fact, it is the backbone of free markets.”
In competitive markets, economic prosperity depends on the successes – as well as the failures – for the market to succeed. A marketplace, scrubbed free of any potential for loss, is really no market at all.