Assessing the Risk of Crowdfunding

Go back

Just how risky is crowdfunding for investors backing start-ups? The stated wisdom has it that crowdfunded start-ups will suffer more failures than businesses which receive seed funding from angels and other more established investment sources.

But recent analysis for Beauhurst, a UK-based provider of data on high-growth and early stage companies, shows that preconceptions regarding the inherent dangers of investing in crowdfunded start-ups should be re-assessed.

Looking at the data for companies formed since 2012 with seed investment, and particularly focusing on the ‘trouble rate’, the team at Beauhurst have been able to demonstrate that while the rate of trouble for crowdfunded companies which were launched in 2012 and 2013 is much higher than with non-crowdfunded companies, the difference is not evident at all for companies formed more recently. (See chart ‘Failure rate of companies by investor type at seed stage (%) 2012-2015)

Source: Beauhurst

As Beauhurst’s Joe Gardiner puts it, “whisper it quietly, (but) crowdfunding may be turning into a form of fundraising far less risky than anyone could have predicted”.

He goes on to suggest that, though the data for the past two years is as yet quite thin, there is evidence enough to be drawing some preliminary conclusions. Firstly, it could be viewed as being a process of growing up, and after finding its feet, crowdfunding has matured and is avoiding some of the mistakes of the early years.

But it could also be that the form is attracting a greater reputation that is attracting companies that might not have considered crowdfunding previously.
Head of research at Beauhurst Pedro Madeira says: "Launching an equity crowdfunding campaign has, in the space of five years, gone from carrying a significant level of risk to being a highly professionalised way for companies to receive publicity alongside funding."

In effect, companies now have the choice of a reliable, efficient mechanism and can benefit from the public exposure that a crowdfunding campaign brings. Further, this public exposure also increases the confidence of other investors, particularly VCs which often now opt to use crowdfunding as a top-up to institutional financing rounds.

This isn’t to say that crowdfunding hasn’t has its public failures – stories abound from other sectors. But the indications are that with the type of recognition that FSA regulation infers, there is likely to be more crowdfunding success stories in the years to come.