Small Talk: Failures happen. But they won’t put investors off equity crowdfunding

In truth, this is likely to be the pattern of equity crowdfunding in the years ahead

Are the wheels about to come off the booming equity crowdfunding sector? Platforms such as Crowdcube, Seedrs and Syndicate Room raised record sums for small businesses last year, as investors flocked to put money into growing companies. 

However, the administration of claims-management company Rebus Group, announced last week, is the biggest failure in the sector so far. Might that prompt investors to think again about equity crowdfunding, hindering its future growth?

Certainly, there is widespread disappointment over the collapse of Rebus, which raised £800,000 via Crowdcube last year. Some of the investors look likely to lose six-figure sums.

And Rebus is far from alone. A study published last year by the industry analyst AltFi found one in five companies that raised money on an equity crowdfunding platform between 2011 and 2013 had subsequently gone bust, costing investors a total of £5m.

Of course, another interpretation of those statistics would be that four in five of those companies are still in business. That’s actually a remarkable rate of survival given the high-risk nature of running a small enterprise. Moreover, Crowdcube could point out that it has had some handsome successes as well as failures. Hundreds of backers of E-Car Club made “multiple” returns on their money when it was bought last year by Europcar. And in December Camden Town Brewery, which had also raised money on the platform, was bought by AB InBev, the world’s largest brewer – investors are thought to have earned returns of 70 per cent.

In truth, this is likely to be the pattern of equity crowdfunding in the years ahead: there will be both spectacular successes and total blow-outs. But while this sort of outcome would sit uncomfortably with investors in traditional collective investment vehicles such as unit trusts or pension funds, there is good reason to think it is exactly what most investors in equity crowdfunding are anticipating; research has repeatedly shown that they have portfolios of holdings in order to diversify risk

It is in everybody’s interests, however, that the platforms continue to be as open and vocal as possible about the risks. For one thing, businesses are increasingly relying on the sector as a source of funding – Crowdcube, for example, was behind more capital raisings last year than any other provider in the UK, including private equity and venture capital firms. The sector can ill afford any whiff of scandal that might put investors off.

Investors, meanwhile, want to go on investing in interesting companies, even though some of them will fail. All the more so give the growing maturity of crowdfunding, with the platforms being used by larger businesses that would previously only have offered equity to business angels or institutional investors.

The introduction of regulatory standards across the sector in 2014 has certainly helped, since it requires the platforms to screen out less sophisticated investors, while it is also worth pointing out that the commitment required of investors is often reduced by the 30 per cent upfront tax relief available from the Enterprise Investment Scheme, for which most of these businesses qualify.

For all these reasons, equity crowdfunding platforms can and will cope with the fallout from Rebus’s administration. Those who warn that it will undermine the appeal of the sector have not understood the nature of its pitch.

Still, this episode is a reminder of the risks. Entrepreneurs need funding to get their ideas off the ground, and they also need the freedom to fail. As long as everyone understands this, they shouldn’t find themselves shut out.

‘Scandal in the making’ as small firms suffer on loans

Thousands of small firms are being misled into paying expensive interest rates and a raft of other opaque charges when they borrow money, according to one lender – all because of a loophole in the law. Overdraft provider Growth Street has described the lack of regulation of commercial finance products offered to limited companies – such transactions are beyond the scope of City watchdogs – as a mis-selling scandal.

“This is an issue which affects every UK small business with finance, and which constitutes the next UK financial scandal in the making unless it is addressed with urgency,” warned Growth Street chief executive James Sherwin-Smith. He said small firms were paying more than they should for borrowing because commercial finance providers don’t have to quote statistics such as annual percentage rates (APRs), which would enable a fair comparison of products. Growth Street has enlisted the support of organisations such as the Forum of Private Business in a campaign to have APRs made mandatory in the sector.

Widen your horizons for export opportunities

Britain’s small firms are missing out on valuable export opportunities by focusing on traditional overseas markets rather than identifying the countries where their products might be most in demand, new research suggests. A report from FedEx Express says that while UK firms are most likely to focus on Europe and North America, they might actuallyhave more success in Singapore, Hong Kong and Colombia.

These are the countries where small local businesses are most likely to import, the report suggests. “The research shows the extent to which opportunities exist all over the world,” said Martin Davidian at FedEx Express.  “UK SMEs should look to tap into these lands of opportunity.”

Anna Mackenzie and Lucy Wright, Founders, Cuckoo Coms

We started selling our Bircher muesli in Selfridges in January 2014 and at the end of our second year our turnover reached £200,000. We met at school when we were 13 – and 14 years later it’s really exciting to have built this business together. 

We got the company up and running after leaving university; we were convinced there was a market in the UK for Bircher muesli, which is very different to what Britons are used to because the oats are soaked in apple juice and stirred in with yoghurt and fruit. 

We spent a year working on the product – conducting tastings, developing our brand and marketing, and making contact with potential stockists.

As part of our research, we talked to lots of other food businesses and many of them suggested Selfridges was a good place to start, because it’s really keen on offering customers innovative new products. Then we used our Selfridges listing to help us get into independent food shops such as Whole Foods, and once we’d done that we approached Waitrose, and from there we went on to Tesco. Ocado has just begun  stocking our products.

We are now stocked in around 1,500 stores, up from 70 a year ago. But it’s a constant battle – you almost have to convert customers one by one. One idea that has worked really well is the “office drop” – we’ll drop off 100 samples at a different office each day to give more people the chance to try the product.

 

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