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Author: Sacha Bright, CEO
Since founding Business Agent Ltd 6 years ago, now rebranded to NextFin we have aggregated and monitored over 3000 equity crowdfunding pitches and the industry is around 10 years old. The FCA regulates the industry and on December 9th new rules came into force highlighting the need for transparency and collaboration.
When I first discovered equity crowdfunding I could immediately see the true potential of the marketplace. The power of the internet could attract millions of investors to launch some of the most exciting startups around. I could also see a secondary market that would one day challenge stock exchanges around the world.
Circa 2009 Darren and Luke from Crowdcube and Jeff Lynn from Seedrs aggressively lead the way with their platforms. It was shaky times and both organisations have fought hard to get to the top, which I commend. The vote is still out for what type of Equity Crowdfunding is the best way forward; should the industry be Fund lead, Nominee lead, Lead investor lead or should the Crowd hold the shares? For me I think it's a mixture of all 4 and the market should diversify into specialist areas in much the same way specialist brokers and nomads feed the London Stock Exchange.
The real challenge is what businesses do you back, how do we market equity crowdfunding going forward to protect its reputation and why back equity crowdfunding campaigns at all when out of the 4500 campaigns we have monitored less than a handful of companies have exited, 6 years on? For me, Equity Crowdfunding is still a teenager as far as investment is concerned but the future is bright providing it evolves. The marketplace needs to collaborate more and promote investments clearly with realistic expectations on returns to protect its future reputation. In most circumstances investing in an early stage private company can take 7 to 10yrs to exit and a large percentage of these businesses fail. However because most early-stage businesses are EIS/SEIS investments, investors can recover the majority of the loss from the taxman providing they are in the right circumstances and, as long as an investor diversifies across multiple investments they can mitigate their losses and possibly make a profit. I hate saying this and being negative but the stats don't lie and if you ask the platforms outright they will only come up with a handful of company exits, yet they have backed hundreds of companies.
It is interesting to note that Seedrs has published a report showing returns based on valuations and their secondary market exits. Which is good and I commend their entry into the secondary market however these exits would increase if they shared the marketplace and allowed shares to be promoted outside their platform. Now don't get me wrong I actually love these guys and what they have achieved. But in the spirit of true transparency, they need to make it clearer on how many companies have exited and how many secondary market exits have made a loss or profit. Rather than highlight the positive which could be construed as misleading. This is true transparency.
Darren Westlake has recently published an article regarding the evolution of Crowdfunding and how Crowdcube have been targeting larger businesses, which are more likely to exit. However, the issue still remains where are the returns going to come from when many of these companies do not provide a liquid secondary market for their investors? At NextFin we provide a solution through JP Jenkins one of the oldest match bargain specialists in Europe where companies can facilitate a service to sell their secondary shares and market them to new investors. NextFin has started to rate the businesses appearing on platforms which gives investors the chance to make an informed decision when investing.
NextFin believes that to facilitate the growth of the secondary market the equity crowdfunding platforms need to share the data on companies that are equity crowdfunding to allow for comparison. The FCA crowdfunding new rules seem to focus on P2P lending however the spirit of the document encourages platforms to be more transparent and collaborative. This level of transparency instils trust in the industry and allows the independent advisors to compare & rate the investment opportunities fairly. Once the company has done their first funding round NextFin are monitoring the business that have funded and are encouraging them to speak to NextFin so that we can monitor the growth of their business independently and when an investor wants to exit or invest they can see an independent tracked rating of the business showing the growth of the company throughout its funding rounds and life. This level of detail and collaboration facilitates a route to a trusted and truly liquid secondary market.
As my Chairman, Stephen Hazell-Smith, remarks comparability brings trust and trust brings a sustainable market place.
Tagged: equity crowdfunding Crowdcube Seedrs
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