Equity crowdfunding made it possible for consumers to invest in startups, which until recently were only accessible to the very few. But investing in startups is highly speculative.
How good are the returns on these investments so far?
At Dealroom we reviewed just over 175 European companies that were funded on various crowdfunding platforms.
Measuring each company’s performance requires some creativity, as they are private companies after all. There are some indicators of success, however:
- An exit, creating a realised return for investors
- Lots of follow-on equity rounds suggest at least the company is doing well enough for investors to keep believing in the company
- If professional VCs invest in these follow-on rounds, that is an even better signal
- We measured web traffic growth and social engagement as a measure of their rate of growth since being funded
COUNTING THE SUCCESSES
E-Car Club, the London based electric vehicle car club, sold a majority stake to Europcar, Europe’s leading car rental company, in July 2015. The 63 members that invested in E-Car Club through Crowdcube received a “multiple return” on their investment.
E-Car Club had raised £100,000 in seed funding via Crowdcube in March 2013 and subsequently raised another £700,000 in two rounds from VCs and angel investors.
Here’s the thing: E-Car Club is so far the only “realised” success in Europe we found.
Update: just this week, crowd-funded Camden Town brewery was acquired by mega-brewer AB InBev.
We’ve identified a further 12 companies as “high potential”, based on the fact that they’ve received follow-on funding after their crowdfunding round, with backing from prominent VC firms. Some examples are mentioned below.
- Parking app Justpark received funding from Index Ventures and BMW i Ventures and then raised £3.7 million in a record breaking round via Crowdcube (with existing investors chipping in).
- P2P mortgage lending platform Landbay first raised £0.5 million via multiple crowdfunding rounds on Seedrs until July 2014, and then six months later raised $2.4 million from Omni Partners – and another six months later secured £250 million in lending capital from a European asset manager and a UK bank.
- Classified search engine Adzuna received £1.8 million in multiple rounds from Index Ventures, The Accelerator Group and Passion Capital, and then raised £1.5 million, partly via Crowdcube and partly from its existing VCs.
- Ad tech firm Adludio first raised £100,000 via Seedrs, then shortly after received €1 million in funding from Balderton Capital, Ballpark Ventures and Passion Capital. One year later it went back to Seedrs to raise another £0.5 million.
Apart from these four, some other noteworthy mentions include Seedrs, Crowdcube (both equity crowdfunding platforms themselves), Chilango, Emoov, Snappcar, Hooptap, Silkfred, and Stamplay. From the sample, there are roughly 30 companies that have measurable traction, but are way too early-stage to classify as a high-potential.
In conclusion, out of the total sample of 175, the list of successes appears to be still quite thin, with only one definitive result so far. That’s not much either way you slice it.
But what should expectations look like to be realistic?
As a rule of thumb, VCs often target a “1/3, 1/3, 1/3” success ratio. That means ⅓ of investments need to be successful and generate a 5x+ multiple to cover the ⅓ of bad investments and ⅓ of mediocre investments and make a good overall return. We are still far away from this (this target would imply over 50 successes in this sample of 175 companies).
However, most of these are still young companies which undoubtedly need to be given more time. Also, this is not meant to be definitive research; hopefully this can be the kick-off of a discussion that could lead to more data transparency. We are very open for input from the industry to improve this research!
FURTHER NOTES ABOUT THE SAMPLE
In total, these 175 companies raised €178 million, of which about 75% came from campaigns on various crowdfunding platforms, in which sometimes VCs also participated.
The remaining was raised from VC-only funds and accelerators.
The vast majority of companies was based in the UK, which is likely attributable to the UK’s tax relief offered by the (Seed) Enterprise Investment Scheme, and the overall size of its startup ecosystem. The UK also boasts the healthiest alternative financing market in Europe.
Dealroom also has company financials on these companies, from regulatory filings. However, they were not found meaningful for this research considering the majority are early-stage businesses.
ABOUT CO-INVESTING WITH PROFESSIONAL VC FUNDS
What’s interesting to see is the timing of VC rounds (before or after the crowdfunding round). Out of the 150 companies, 20 have also received capital from VC funds. About 5 companies were already VC-backed at the time of the crowdfunding round.
If the existing VCs choose not to participate in the next round, retail investors might wonder why not, given that the existing VCs presumably have superior information. About 8 companies did a crowdfunding/VC mashup, meaning both retail investors and VCs get in at the same time and similar terms.
Everything else being equal, this should be the preferred option for retail investors.
INHERENT RISKS IN CROWDFUNDING AND HOW TO AVOID THEM
At Dealroom we are believers in the equity crowdfunding model in the long term but there are clearly some significant risks for investors. A startup is a special kind of high risk investment, combining the unpredictability of FX trading with the illiquidity of real estate investing. Startup equity is essentially like an illiquid out-of-the-money stock option. And many retail investors don’t fully understand this.
There’s the “adverse selection” risk, which means that unaware retail investors might only be offered those startups that have already been turned down by venture capital funds.
Finally, cap tables can get complicated as other VCs invest in larger follow-on rounds, making the payout distribution in case of success far from obvious.
The crowdfunding industry is still young and the aforementioned problems can eventually all be solved. As crowdfunding and public stock markets converge, transparency and liquidity will improve. Complexity can be reduced.
In the meantime, the deals where crowdfunding platforms and VC funds invest concurrently are probably the relatively safest choice for retail investors.
Featured image credit: Miriam Doerr / Shutterstock