How do small businesses raising money on equity crowdfunding platforms maximise their chances of getting the funds they’re seeking? New research suggests it’s all about emphasising the right part of the pitch: investors seem to care most about the management behind such businesses, they worry about the product too, but aren’t so bothered by the financials.
CrowdRating, which styles itself as an independent ratings agency for crowdfunding, looked at more than 150 equity crowdfunding campaigns conducted last year on four major platforms, Crowdcube, InvestDen, Seedrs and Syndicate Room, including both successful and failed fund-raisings.
The agency gave each campaign a gold, silver or bronze rating on quality of management, quality of product and quality of financials, in order to understand what criteria investors were basing their decisions on when committing their money.
The results weren’t necessarily as expected, says Modwenna Rees-Mogg, a founder of CrowdRating. “It was not entirely surprising to discover that the crowd focuses on the quality of management teams and products when assessing investment opportunities, not least because many campaigns and platforms put greater emphasis on this information,” she says. “What is more revealing is the crowd’s apparent indifference to the financials.”
The study’s key findings included:
- The crowd is strongly influenced by information on management teams and product.
- The crowd is able to recognise good management and spot when the company’s product offering is weak.
- Campaigns with the highest ratings for management and product are more likely to win support from the crowd – 41% of campaigns with a gold rating for management succeeded, whereas only 7% of those with a bronze rating for management successfully raised funds.
- Companies with less good products were particularly likely to be unsuccessful: 35% of campaigns with a bronze rating for product were unsuccessful in their fund raising; only 18% of those with a bronze rating for product successfully raised funds.
- The crowd is largely indifferent to key financial criteria such as valuation and business performance projections.
- Valuation has little impact on a company’s ability to raise funds. But if anything the data shows that the higher the valuation the more likely a campaign is to succeed – more than 70% of companies with a valuation over £5m were successful, compared to 49% of those with valuations under £5m.
- Even amongst seed stage deals, where lower valuations are typically seen as more attractive, companies with higher valuations were funded successfully
- A company projecting as much as two times’ or three times’ year-on0year profit growth appears just as likely to gain investment as one with more conservative projections.
Julia Groves, the chair of the UK Crowdfunding Association, says the report suggests platforms have been working hard to improve the quality of businesses pitching on them. “It is good to see that scores have been getting higher since its launch, as all platforms increase their due diligence, screen out lower potential businesses, and increase the amount of quality information available,” she says.
(source: David Prosser – Forbes.com)