The downfall of claims management company Rebus would have had crowdfunding sceptics chortling into their morning coffees. The London-based business raised more than £800,000 from 109 investors on equity crowdfunding site Crowdcube in March last year. Ten months later, it went under and became the biggest crowdfunded failure to date.
But, it wasn’t the fact that another crowdfunded firm had gone into administration that caused the cynics to say, “I told you so” — industry experts predict that well over half of the deals struck on crowdfunding sites will turn sour — rather, it was the reports that Rebus might not have shared the full extent of its financial difficulties with the crowd before it raised new funds. And, for the crowdfunding doubters, this only proved to fuel their grievances that not enough emphasis is put on sharing financials, nor transparency or due diligence.
The company’s collapse also raised the issue of inflated valuations. Rebus was valued at £12 million when it fundraised on Crowdcube, despite pre-tax losses of £1.9 million in 2015, up from £1.3 million the year before. The company told potential investors it was forecasting profits of almost £5 million within two years and £12 million the year after that. Some investors might have thought Rebus was being a little overambitious. For others, the red flag would have been waving furiously.
A recent report by Crowdrating, an agency which examines data coming out of the sector, suggests platforms need to do more to educate the industry’s inexperienced investor base on financials. Crowdrating founder Modwenna Rees-Mogg said she feels there “needs to be a broader industry debate about the positioning, quality, and analysis of financial information”.
I agree with Rees-Mogg that there is room for more scrutiny. But, isn’t it time for the crowd to pay more attention? Crowdrating’s study found that backers on crowdfunding platforms are more likely to base their decisions on information about the management team and product rather than the company’s numbers. This explains why some crowd investors have unrealistic expectations when it comes to returns. They need to wise up.
Now, they can. The UK Business Angels Association has launched the UK Angel Investing Accreditation, a qualification which will be targeted at all investors registered on equity crowdfunding platforms (about 500,000 people made investments last year and at least half had never backed a small business before). It’s not promising to transform a brick-layer into an experienced investor overnight, but, it could provide some crucial lessons on what to look at when deciding whether to become a backer. It’s a signal in the right direction and hopefully budding investors take advantage. The crowd should eventually take some responsibility for bum deals, too.
Kiki Loizou is the Small Business Editor at The Sunday Times.