The Investor 94 Asia

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THE INVESTOR

quality of due diligence and investor disclosure.

Pronto, for example, a food delivery start-up,

collapsed just three months after raising

hundreds of thousands of pounds on Seedrs.The

Solar Cloth Company, meanwhile, raised almost

£1 million via Crowdcube. Only after it

collapsed 18 months later did it emerge that the

entrepreneur who had led the campaign had

been declared bankrupt twice and had a string

of failed businesses behind him.The company’s

demise is being investigated by the government’s

Insolvency Service.

Entrepreneurs report that crowdfunding

platforms have improved the standard of due

diligence since the industry’s early days.

It took HAV five weeks to go from making the

decision to raise funds to listing its offer on

Crowdcube. ‘It was reasonably straightforward

in that respect. However, there was a lot to cover

off in that time, particularly regarding extensive

due diligence to ensure every statement we made

was fully justified,’ says McGlennan.

Assuming that disclosure standards are indeed

improving, there are plenty of other issues with

crowdfunding for investors to be wary of.

One is the fact that it is not uncommon for

businesses to fail to provide any investor

communications.

Refreshingly, HAV takes its responsibilities

in this area seriously, McGlennan says. It holds

an annual shareholder meeting and sends out

a monthly newsletter with both business and

technical updates as well as more general stories

about Airlander’s progress.

‘Crowdfunding is a good route,’ he says, ‘but

only for companies willing to be very open and

public about their business and fundraising, and

transparent about their plans.’

Sadly, not every business that has crowdfunded

is as enlightened as the HAV boss when it comes

to understanding that selling shares to the public

should involve signing up to a certain standard

of transparency.

Joe Plimmer. Sources: 1 forbesmiddleeast.com, May 2017; 2 invess.com, March 2015; 3 altifidata.com, January 2017; 4The Deal: Equity Investment in the UK,Year 2016; 5 crowdfundinsider.com, September 2016;

6 about.beauhurst.com, March 2017; 7 companieshouse.gov.uk, May 2017; 8 fca.org.uk, December 2016

companies, according to the Liberum AltFi

Volume Index

.As a result, the online platforms

that enable small businesses to sell stakes to the

public have won their fair share of praise.

‘Democratization’ is the buzzword often

bandied about to promote crowdfunding; what

was once an asset class reserved for the very

wealthy is now open to everyday investors.

Companies, meanwhile, have both a fresh route

to raising money and a way to increase loyalty and

advocacy from customers.What better way to keep a

customer interested than to make them a shareholder,

even if they did only pay £10 for their stake?

The importance of crowdfunding as a source

of capital is underscored by the fact that of the

1,203 equity investment deals completed for

private companies last year, a quarter (301) came

via crowdfunding, according to industry analyst

Beauhurst

Stephen McGlennan, Chief Executive HAV,

says that crowdfunding was a ‘natural route’ for

his company, given the level of public interest in

the unusual business.

However, not everyone is convinced that the

industry is always providing a good, or even fair,

deal to investors.While it is still relatively early

days for crowdfunding, the biggest question

hanging over it is the shortage of financial

returns it has provided to date.

Beauhurst says that since 2011 there have been

only 13 ‘exits’

– moments when shareholders

who have subscribed through crowdfunding have

been able to sell their holdings – and these have

been at best solid rather than spectacular

.While

things could yet turn around, the fact that only

1% of companies have produced a return is

clearly disappointing.

What of the failures? Beauhurst reckons that

11% of funded businesses are dead or ‘zombies’,

a modest figure in the context of the high-risk

world of start-up investing.

Yet, there have been some spectacular blow-ups,

which may point to broader problems over the

Of the

1,203

equity investment

deals completed

for private

companies last year

301

Since

2011

there have

been only

exits

where

crowdfunding

shareholders have

been able to sell

their holdings

a quarter came via

crowdfunding

Platforms need

to crack down on

the sometimes

ludicrous

valuations they

are accepting

from companies