One of the biggest concerns about alternative finance is the lack of transparency, and consequently the asymmetry of information between buyers and sellers. The British quity crowdfunding (ECF) market is growing massively and more and more investors are pouring money into the industry. But the more it grows the more concerns related to investors’ protection rise amongst industry observers.
Recently , AltFi Data issued a interesting report on 367 companies that have gone through crowdfunding between 2011 and 2013. According to their research, approximately 80% of those companies are still trading. However, less than a fourth has been proven to be trading at a higher valuation compared to the crowdfunding campaign. This leads to a portfolio IRR of 2.17% which is relatively low, if not supported by considerable EIS and SEIS incentives.
While we agree that such a report is useful to transparently demonstrate both the risks and the returns available from ECF, it does raise other questions regarding the industry sustainability. For example, if an investor is happy with a 2.17% return, are his investments more likely to succeed in the future or more likely to fail? If he thinks it is time to profit from a investment, does he have any chance to exit? How can he assure any buyer that the information provided to them is accurate and true?
There are a few secondary markets trying to find a way to provide an exit to investors but such activity is closely monitored by the FCA and it seems that it is not fully approved by the authority. Hopefully one will succeed although it will be a long journey. To do that they have to ensure a high level of transparency to make any deal possible, as well as a strong valuation of the market opportunities. But this alone does not solve all the problems, since they will collapse if the primary market buckles.
As a matter of fact, it seems that such investments are valuable mainly because of the governmental incentives. But what will happen if these incentives stop? What will happen to the incredible potential of ECF?
We don’t have a crystal ball and we cannot predict the future, but it could happen. ECF has proven that the community is interested in making investments in small enterprises because of their value proposition. How this can be reflected in a systemic approach that guarantees market sustainability together with a charming investing system is the new challenge of crowdfinance. We don’t have an answer yet, but it is definitely on our radar.