CrowdRating, an independent platform that seeks to rate securities that are raising capital online, has published a report based on data culled from 155 equity crowdfunding campaigns from April 2015 to December 2015. The crowdfunded offerings were taken from four different platforms: Crowdcube, Seedrs, SyndicateRoom and InvestDen. While certainly not covering the entire equity crowdfunding industry it is a solid measure.
The report, ‘Observations on 2015 Crowdfunding Campaigns’ (embedded below), observed that investors focus on management first, then the product. This is similar to how VCs work. The team is profoundly important. Even if a product/ concept is great, a team that does not have the horsepower is more inclined to fail. CrowdRating states;
“…backing the right team with a great product is the way for a company to win investment”
Investors are more indifferent to valuation and the anticipated financial performance (at least initially). This is something the authors suggest the industry address by providing guidance and educational tools so investors have a better comprehension of the operational risk.
Modwenna Rees-Mogg, one of the report’s authors and a founder of CrowdRating stated:
“It was not entirely surprising to discover that the crowd focuses on the quality of management teams and products when assessing investment opportunities, not least because many campaigns and platforms put greater emphasis on this information. What is more revealing is the crowd’s apparent indifference to the financials. We believe there needs to be a broader industry debate about the positioning, quality, and analysis of financial information within a campaign and more discussion around if, and how, investors should be encouraged to pay more attention to financials as part of their overall investment decision making.”
CrowdRating ranks the companies based on a set of 90 questions “typically asked” by early stage investors. Companies ranged from pre-revenue to more mature businesses. They did say that none of the firms had officially failed but a small number were probably the “walking dead”. While there was broad diversity in the types of companies, Food & Drink was number one in volume (24).
The authors noted that the highest valued businesses, registered the best chances of crowdfunding success: over 70% of companies with a post-money valuation in excess of £5 million succeeded. More interestingly, perhaps, even those companies with a post-money valuation of £5 million or less still succeeded in almost 50% of cases.
Additional findings of the analysis are:
- Campaigns with gold ratings for management and product are more likely to win support
- 41% of campaigns with a gold rating for management succeeded, whereas only 7% of those with a bronze rating for management successfully raised funds.
- 35% of campaigns with a bronze rating for product were unsuccessful in their fund raising.
- Only 18% of those with a bronze rating for product successfully raised funds.
- Even seed stage deals (46% of the total data set), where lower valuations are typically seen as more attractive, companies with higher valuations were funded successfully.
- A company projecting as much as 2x or 3x year on year profit growth appears just as likely to gain investment as one with more conservative projections.
- Companies are more likely to underperform than over perform in the early years of their existence, thus suppressing valuation in the future
- Exits will take some time…
Julia Groves, Founding Chair of the UKCFA reflected on the data generated by the report;
“This is an interesting first report from CrowdRating, showing that in 2 out of 3 categories the crowd is consistent with their Ratings Engine. It is also good to see that scores have been getting higher since its launch, as all platforms increase their due diligence, screen out lower potential businesses, and increase the amount of quality information available. As an industry, we work hard to educate investors and are always interested in independent sources of insight to build the wisdom of the crowd.”
CrowdRating recognizes that data is still rather young. It will take some time to generate better empirical results as the industry matures.
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