What counts as success in equity crowdfunding? Investors need to know what they can expect. Startup investing can be a long process, with multiple stages. The company may have no revenue, so it won't be paying dividends.
It will be a long before the shares are listed on any exchange, or an over-the-counter market (OTC), so your investment will be 'not readily realisable.' (That's the regulator's jargon for saying that you're stuck with it, and you'll be lucky if you can find a buyer.)
According to Chance Barnett, the CEO of US equity crowdfunding platform Crowdfunder, the traditional venture capital model involves backing 30 to 40 startups which means a top performing fund makes a successful investment roughly 15 to 20 percent of the time. That's why early stage equity has traditionally been out of reach of smaller investors.
In the UK crowdfunding space, research by Intelligent Partnership suggested a startup portfolio needs to hold at least 28 companies to deliver a 95% chance of including a at least one business returning 10x or more. (Another Crowd covered this in June 2016.)
Unfortunately, none of these topics gets coverage in Meet the UK equity crowdfunding success stories of 2016, an article published today in startups.co.uk
Thirty businesses are featured, each of which raised between a million and ten million from crowdfunding investors in 2016. But something very important is missing from this picture, and that's the investors' point of view:
All the businesses in this equity crowdfunding hit parade are held up for our applause because - ta-daah! - they have extracted a lot of money from investors.
We're sorry, but that isn't what we count as business success. Capital raised from investors is Value At Risk. It's money that could be lost. In fact, it will be lost, unless the entrepreneurs spend it wisely on executing their business plans, and create something that has lasting value.
We immediately recognised three firms we've covered over the past year, each time focusing on the issues investors worry about after the money has gone in:
- The company that built a prototype - and promptly crashed it!
(Hybrid Air Vehicle Has Bumpy Landing
- The investors who must wait years to see any returns
(Handcuffs In The Small Print At Monzo)
- The company whose expansion is on track, thanks to a strong story and a well-connected backer
(Social Proof, Storytelling And The Crowd
We can't emphasise too strongly that the purpose of crowdfunding is create something of lasting value. Price is what you pay, value is what you get for your money.
Businesses don't succeed when they take money from investors. Success is when they give it back to you, with more on top.Please bear that in mind.