The Equity Crowdfunding Horror Show

Vampires of crowdfunding: the blood is fake, but the biting is real.

Be afraid, crowd investors: unscrupulous companies will take your money and waste it. You will never see a return on your investment. On Monday, The Memo published an interview with someone they called "crowdfunding's greatest critic."

In a field where major news outlets like Money Week, the Financial Times, the Express and the Guardian run fear-mongering pieces warning people of the folly of dabbling in alternative investments, we were expecting a big name. Would it be Kadhim Shubber, of the Financial Times, perhaps? His pieces are hard-hitting, well researched, and he makes us think.

Or perhaps they'd go for someone like Katherine Denham from City AM, or someone from Forbes, or the Daily Telegraph. But no. To our surprise, they chose a self-employed crowdfunding consultant, who has a blog. 

In the words of Private Eye: "Surely some mistake?"

If you read the original article, you'll see the details, and have a chance to click through and read his blog, too.  Here are three points from the interview:

  • "If you consider the two sides of crowdfunding – investors and companies – then you are looking at a match akin to schoolchildren vs Man United."

  • "We should go as far as having a driving test for new directors – it is far too easy to set up a business and go bust, and then rinse and repeat."

  • "Many of these are not businesses that require or could even use investment. They make money for the owners and staff and, as we have seen on so many occasions, trying to make them into the next Facebook just blows them up."

The way he describes it, equity crowdfunding is a playing field that is quite severely tilted, in favour of the business owners, and against the investors putting money into them. 

So, does this critic knows whereof he speaks? Yes, he does. 

When we looked at his blog, we saw a nice big advert saying "Contact Us Here".  The mega-critic runs a consultancy, advising business owners how to raise money from - whisper it - equity crowdfunding.

This is his business model. it seems. He proclaims the market is badly skewed, and vulnerable investors are easily exploited (read those three quotes again).  He tells you he knows how to help you! Then he delivers a payday for his client, the business owners -  'Manchester United' in his words - and the schoolchildren, by the sounds of things, get to go home in a figurative ambulance.

We were not impressed.

What the UK crowdfunding sector needs today is people who are prepared to look out for the investors. That's not going to be delivered by crowdfunding's scariest pantomime villain.  Equity investing in early stage companies is risky. Crowdfunding doesn't make it any less risky, but it does make it more accessible to a more people with smaller sums to invest. We think that's a good thing. But new investors need to learn how it works.

Equity crowdfunding is not a 'get rich quick' scheme. It needs 'patient capital'. And anybody who tells you it's about 'the next Facebook' is talking through their elbow.  Avoid people who talk about 'unicorns'. They are mythical. You're better off putting together a portfolio of small companies that have growth prospects, and whose plans make sense to you.

Equity crowdfunding needs investors who can tell a good risk from a bad one. To take our 'greatest critic' up on his suggestion of a driving test, it's all about learning to drive safely and going on journeys to places you want to go to. It's definitely not about applauding gleefully at a series of car crashes.

Entrepreneurs need investors who offer money and share in responsible risk-taking, with a view to seeing the business through to a sustainable profit. We believe that's a skill that many people can learn.

It doesn't require genius, or madness, or anything rare. It just takes average intelligence, thoughtfulness, patience and enough self-awareness to know when there's a risk you feel comfortable saying 'Yes' to, and when you know you need to say 'No'.