Crowdfunding: Why Startups Are Ignoring The Risks And Betting The Farm


Alison Coleman

September 14, 2016

Crowdfunding, peer-to-peer lending, social finance, however you choose to describe it, is settling into its stride and evolving into a well-established industry. Last week, Seedrs went further, declaring that crowdfunding had come of age, with results of its portfolio update report showing better annualised rates of return than most other asset classes, since its platform launched in 2012.

Even more encouraging is last year’s $34 billion global crowdfunding total, revealed by the 2015 Massolutions Crowdfunding Industry Report, which could be close to $100 billion by 2020. Who needs the banks any more? Then you cast your mind back to Europe’s biggest Kickstarter project, the Zano mini-drone, that crashed and burned last year, leaving many of its 12,000 backers, who’d put in £2.3million ($3.5 million), with nothing, and the crowdfunding cynics saying ‘told you so’.

The crowdfunding dichotomy is puzzling; mature enough to be considered almost mainstream, yet still fraught with risk, as highlighted by the Zano failure. Nevertheless, for many startups crowdfunding is still their best and possibly only hope of getting products to market.

Entrepreneur Peter Ramsey recently crowdfunded £200,000 for his company Movem, an Airbnb style review platform for residential tenancies, landlords and agencies.

He says: “I’m not sure it was our ‘only’ option, but it was certainly the best option for us. We had to prove that people wanted an alternative to Rightmove and Zoopla. What we’re offering has never been done on such a scale before, and we’re trying to create a marketplace that doesn’t really exist yet.

“We’d been pitching at events, pitching to investors and we kept coming up against the same issue; do landlords actually want this? So yes, crowdfunding was the only way we could prove, undeniably, that people wanted this. We had a number of landlords and agencies invest in Movem themselves.”

Since completing the crowdfunding, which took just 10 days, Movem has been approached by much larger investment companies, and a number of students’ unions; proof that the vision is shared by many.

Entrepreneur and founder of Fonesalesman Bavan Palasanthiran’s first campaign, for iQi Mobile, a wireless charging product, surpassed its Indiegogo funding target by more than 500%. Two years on, Fonesalesman is a leading supplier of wire-free charging solutions globally, expanding to the US, Spain, Italy, Germany, France, Japan and Canada.

Palasanthiran says: “When iQi Mobile was originally conceived and developed, self-funding was considered, but it was decided that crowd funding could be a good way of gauging the excitement about the idea as there was nothing similar on the market for the iPhone at the time.

“The campaign’s success enabled us to bring the product to market with an established user base, which would’ve been hard to achieve in such short period of time using any other funding method. Thanks to iQi Mobile being the very first product of its kind for the iPhone; tech blogs, word of mouth on social media, YouTube content creators have been very vocal and active in promoting the campaign leading to snowballing contributions.”

Ramsey agrees that the power of crowdfunding’s reach is key. He says: “It’s easy to get people to see your brand through social media, but Crowdcube gets people to read about your company, watch your video and consider the benefits of your company. We now have more than a hundred people who are financially and emotionally invested in Movem’s success. We hope they’ll tell their friends, their families and it shows a real confidence in what we’re doing.”

There were downsides, including platform fees that were slightly higher than if they had they raised funds privately, and the caveats attached that might affect how Movem grows further down the line.

Fundamentally, says Ramsey, if you don’t raise the money, you’ve failed very publicly. “Companies do fail on crowdfunding, and I think if we’d failed with this round, we’d have struggled to invest privately.”

Palasanthiran, too, is aware of the pitfalls. He says: “When it comes to manufactured goods, creators succeed at prototypes and 3D renders, while the lack of experience and know-how in manufacturing leads them to underestimate the importance the challenges of producing products on scale. This often results in severely delayed campaigns, spiralling costs, and a struggle to produce enough quality products.”

Relying almost solely on a crowdfunding campaign is considered a high-risk strategy, although the degree of risk depends on the platform. Major players like Indiegogo, for example, offer entrepreneurs help with raising follow-on funds, taking pre-orders for their products or projects and connecting them with manufacturers to help them get their products to market faster. Getting market validation on a major site makes it easier to get venture investment later.

But some experts have concerns, including business coach and author Carl Reader, who says: “Many sites base their rankings on the due diligence that they do on the company, and on the growth in investment levels. Being an active investor myself, I have concerns about the valuations of many businesses on the main sites. However, I am cautiously optimistic about crowdfunding, and provided that we avoid onerous regulation and disasters that cause bad press, it is a great avenue for businesses and investors alike to explore.”

The real question is; how will crowdfunding fare in the current economic and financial climate? Will traditional sources, VC and angels, and crowdfunding be affected equally, or will crowdfunding substitute for VC and angels? The 2015 Massolutions Crowdfunding Industry Report highlighted the advantages of equity crowdfunding over VC, for example, equity crowdfunding platforms can scale in a way that VC’s can’t, by appealing to a much broader audience with a smaller ‘bite size’, and are more able to rapidly test and evaluate a larger volume of deals, in a larger laboratory.

This suggests a rosy outlook for crowdfunding. However, as Richard Fairchild, a lecturer from the UK’s University of Bath School of Management, points out, one problem with equity crowdfunding has been the lack of investor protection.

He says: “These are ordinary members of the public, investing small amounts through their computer websites, often based on a whim, with little understanding of the risks involved. Once the first big failure occurred, the crowdfunded Zano Drone crash being a case in point, would that change the whole dynamic? Will it deter people from investing into crowdfunding in the future? I believe not.

“Behavioural finance teaches us that investor sentiment is quite robust, and soon ‘bounces back’ from previous disappointments. The excitement, passion and herding behaviour will still exist as investors sit at their computer screens, looking at the latest crowd-funded opportunity, and ultimately, Zano is one of few failures, amongst many successes.”


This article was written by Alison Coleman from Forbes and was legally licensed through the NewsCred publisher network.

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