Crowdfunding Success Stories Becoming More Common
Many of those investing online in mainstream regulated markets such as equities and funds may have also considered the higher risk flutter of participating in start-up crowdfunding round. Over the past several years, websites such as Seedrs and Crowdcube have grown significantly in popularity. In 2015, 347 UK start-ups successfully completed crowdfunding rounds compared to just 99 in 2013. Recent data published by start-up researcher Beauhurst suggests that the good news is that as the crowdfunding market has matured so has the chance of investors realising a return.
Young companies are an inherently risky undertaking, both for those behind them and investors who back their business plan. Based on Office for National Statistics figures, just under 50% of all new businesses fail within three years. Those statistics are based on all new companies being registered and don’t take into account how seriously the founders then take the new business. Many are set up on a whim or vague idea and never really have the full focus of their founders. Nonetheless, anyone investing in a start-up should be well-aware that it is the highest risk asset class going. Investing in a start-up through crowdfunding should always be considered a ‘long shot’ investment that is not central to long term investment strategy such as funding retirement. If it comes off it could be hugely profitable but the odds are against that. However, Beaufort’s research does suggest they are significantly shortening.
In crowdfunding, start-up founders sell part of the equity in their business to sophisticated or high net worth investors from the general public in order to raise capital for expansion. It is a way to access finance at an earlier stage than it would be realistically possible to obtain a bank loan or attract a venture capital investor. For investors it is a high risk investment that offers the potential for a big payday if it comes off and the chance to back a young company they believe in, while accepting there is also a significant risk that they will lose the capital they invest.
However, as the market has matured, it seems crowdfunding investors have become more savvy and experienced in identifying strong prospects. Of the start-ups that successfully closed funding rounds in 2013, close to 50% have since ceased to trade. However, only around 15% of those funded in 2015 have since failed. 10 of those funded in 2015 have also achieved an exit already, providing a return to those who participated in their original crowdfunded raise. Only 2 of those funded in 2013 have achieved an exit.
As well as investors becoming savvier in choosing which projects to invest in there may be other factors contributing towards the improvement in fortunes. The websites that present start-ups for crowdfunding do initial due diligence. As they become more experienced there is a strong possibility they are getting better at selecting propositions. Also, as the route to finance has become more popular, start-ups have often managed to raise more capital through crowdfunding. More resources may be giving them a better shot at success.
Of course, making an investment through crowdfunding is still high risk but it’s good to know there is a growing chance that risk might just pay off!
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