Originally Published in the Evening Standard, 21 September 2016


A few years ago, when internet platforms first began to be used to raise capital for companies, there was much hand-wringing.

The platforms did not have the resources of an investment bank or sophisticated financial institution so it was assumed they would be less able to assess the business plans of the potential fund-raisers.

City opinion also held that the funding of start-ups and small, growing businesses was already a well-trawled area, given the extensive presence of venture capital funds and private-equity houses constantly on the lookout for good ideas to back.

Traditional High Street banks also claimed still to want to be in the market. The implication was that if there was anything good out there, the existing players would pick it up.

There would be very little of quality left for new kids on the block.

The fear — stoked, it must be said, by self-interested incumbents who wanted to discredit the upstarts — was that it was only a matter of time, and probably not a very long time, before gullible investors were duped by dubious ventures peddling misleading financial information.

One should pause for a moment just to note the unintended irony here because the implication is that investors in established listed companies are not likely to fall victim to attempts to mislead, but this is of course not the case.

Earlier this year, former Dutch politician Hans Hoogervorst, head of the International Accounting Standards Board, delivered a blast of a speech in which he highlighted just how far companies went to put a favourable gloss on their figures.

He complained that ever-growing numbers of companies on both sides of the Atlantic were using misleading information to inflate their profits.

“More than 88% of the S&P 500 currently disclose non-Gaap metrics in their earnings releases,” Hoogervorst said — Gaap being the US accounting guidelines.

“Of these releases, 82% show increased net income and are clearly designed to present results in a more favourable light.”

They get up to all manner of tricks. Executives remove the nasty bits, and class costs that in fact occur in some form every year as exceptional.

They make like-for-like comparisons, which are not like last year at all. They take credit for profits that have not been, and may never be, earned. They pay people in shares rather than cash but don’t deduct the cost of those shares. They rarely admit that these inflated figures bypass the accounting standards.

Given this context from the established markets, what is interesting about equity crowdfunding and the provision of loans through peer-to-peer lending is how little has gone wrong.

True, eavesdropping on fund-raising conference calls can be a toe-curling experience when those seeking the funds get carried away.

There have also been platforms which have abruptly left their respective trade associations, and you can draw your own conclusions as to why. But the industry as a whole has been remarkably trouble-free.

Even more to the point, and though it is still early days, there is now growing evidence that equity crowdfunding is profitable for investors.

Seedrs, which was launched in 2012 and is therefore one of the older platforms, had completed 253 deals across 15 different sectors from launch up to the end of last year.

Earlier this month, it published a comprehensive analysis to show what kind of businesses these were and how they have performed from their initial fund-raising through to the end of July this year.

The results are startlingly good, with the caveat that shares in unquoted and unlisted young companies are difficult to value.

With that in mind, however, Seedrs got Ernst & Young — one of the Big Four accounting firms — to review the valuation processes used.

Seedrs says that, taken as a whole, the 253 deals show an annualised gain after fees of 14.4%.

That, however, is just the beginning because many of these investments qualified for tax breaks as part of various Government initiatives.

If this relief is taken into account, the annualised return then soars to almost 42%.

Separately, Seedrs also calculates that those among its investors who have built up a portfolio of 20 or more different companies have achieved a return of more than 15% on average — which, with tax relief, comes out at 43%.

Nor are they alone. To test the thesis, I also asked Crowdbnk, a rival firm, how it has performed.

They are younger, the sample is much smaller, they don’t just do equity and it really is too early to pass judgment on most of their businesses. But if the half-dozen or so that have had subsequent valuation events are judged as a portfolio, then the internal rate of return is 30%.

One has to stress again that it is still early days and there is much that could still go wrong.

But equally, it would be churlish not to give credit for what has been achieved so far.

On this evidence, crowdfunding is delivering a real benefit to entrepreneurs, investors and the whole country.