Springboard to Funding #6 - Crowdfunding with Shades On

Added Wednesday, November 8 2017

Equity crowdfunding is doing a lot of good stuff. It is currently running at £100m pa invested in early stage companies and it now represents over 15% of the investment in this market. Good companies have received funding, often much more quickly than by conventional routes, jobs have been created and – tell it not in Goth – some investors have even been rumoured to have made some money!

However in anything involving money, there’s always a shady side. Interesting practices which vary between being somewhat dubious to downright wrong. So here’s a collection of nameless stories I’ve heard in various wine bars and coffee emporia on my financial travels. Let’s look behind the crowdfunding shades.

Firstly there is the mates overfunding technique. A successful equity crowdfunding raise is all about momentum. The crowd lurk on line watching to see how you do. If the needle keeps moving they gain confidence and start to invest. Stall and they never will.

So what to do if you lose momentum. Well, one answer is to have some rich mates stick in a wedge of money. Suddenly the needle takes off again, investors regain confidence and low and behold you charge past the finishing line to be funded. All well and good, but you don’t stop there. Now you are into overfunding and a whole new bunch of investors, sensing a good thing, pile in and add more to your raise. 

Now, with you well past your target, your mate can withdraw his money, which any investor has the right to do at any time up to final closure. So you’ve been bumped to funding and it’s cost your mate nothing. If the bump failed and your campaign dies, their money is never put in anyway.

Nothing illegal, but hardly the moral high ground.

Then there are the connections a company makes with potential investors during the campaign. Could the founder not take these and go direct, in effect cutting out the platform. After all, the sites positively encourage communication between potential investors and the company – and quite rightly so. 

Not surprisingly, the platforms have thought of this and their legal agreements prohibit it. However they can’t enforce this forever so there is normally a set period, say 45 days, after the campaign has ended. So what’s to stop a founder who isn’t under too much time pressure simply waiting it out and then connecting with the, normally larger, investors and doing a deal directly? Well, apart from the time it takes, there’s nothing to stop this. You could look at it as a rather cost effective way to access a wide pool of serious investors.

Another rather strange use or misuse of equity platforms which has reached my ears is investors who actively look for companies who have failed to raise. You might have thought that these are the last companies in the world investors would seek, but think again. Firstly, the valuation of the companies having suffered the shock of not raising, is likely to fall. And secondly, the platform and their associate fees are now out of the equation. 

So there’s a bargain to be had and this suits a certain type of investor.

There is another can of worms if you examine what’s missing in the data provided for some crowdfunding campaigns. One hears of previous raises being omitted, often on a different platform and of course the previous projections – now often looking rather ludicrous – may not be exactly highlighted (or even present) on the shiny new campaign. But this is a whole other story.

There are some proper frauds, but from what I can see, these are actually remarkably rare.

So that’s crowdfunding when you remove the shades. However as I started by saying, there’s an awful lot of  good stuff going on and overall equity crowdfunding is here to stay and make a very positive difference.

Just keep an eye out for the somewhat murky stuff before you invest.