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THE INVESTOR
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17
CROWDFUNDING
Some entrepreneurs come to see having hundreds
of small shareholders at an early stage as a burden.
Communications, if there had been any to start
with, dry up. Others complain that the process
whereby prospective investors quiz entrepreneurs
during the fundraising stage provides a chance
for rivals to steal their business plans.
There is a fundamental question, too, about the
appropriateness of crowdfunding platforms’
business model. A study by the Financial Conduct
Authority last year noted an inherent conflict of
interest at the heart of these online registries
where most of the business is done
8
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Since they make their money from successfully
completing a company’s funding offer, platforms’
allegiances lie more closely with companies than
investors.They are financially motivated to raise
as much money as possible rather than to find the
right price for the right companies.This issue
relates to arguably the thorniest crowdfunding
issue of all: valuations.
The biggest risk to crowdfunding may not be the
failures, or even a lack of exits, but a wildly
successful exit that fails to produce decent returns
for investors. If investors pay too much for a
company at an early stage, then the chances of
realising a decent profit years later when, say, the
company floats, are drastically reduced. Chances
are the business will have a series of fundraising
events, all of which risk ‘diluting’ the size of each
earlier investor’s stake.
To tackle this, platforms need to crack down
on the sometimes ludicrous valuations they are
accepting from companies. Crowdfunding
investors might stomach a relatively high failure
rate among the companies they back, as most
understand the high-risk nature of backing a
start-up. But the industry will quickly find itself
unpalatable if it is repeatedly giving backers a
raw deal, especially in the unlikely event that the
business they back does become a world-beater.
James Hurley is the Enterprise Editor of
The Times
CLEARED FOR TAKE-OFF
Stephen McGlennan, CEO HAV,
says crowdfunding was a
‘natural route’ for the business