As more and more businesses turn to crowdfunding as a viable source of investment, what should those taking the plunge look out for when putting together their campaign? According to a report published today, businesses looking at crowdfunding should be polishing their management’s CVs – rather than investing time into perfecting financials.
The report, published today by CrowdRating, the independent ratings agency for equity crowdfunding, suggests that crowd investors are more likely to base their investment decisions on information about the management team and product in an equity crowdfunding campaign rather than information about the company’s financials.
The key point in the report, published today by independent ratings agency CrowdRating and compiled using data from 155 crowdfunding campaigns, is that, surprisingly, financial projections seem to be the least influential factor for investors when considering whether to invest. The report shows that a company’s valuation has little impact on their ability to raise funds; if anything, the higher the valuation, the more likely a campaign is to succeed. More than 70% of companies with a valuation over £5 million were successful, compared to 49% of those with valuations under £5 million. A company projecting as much as 2x or 3x year on year profit growth appears just as likely to gain investment as one with more conservative projections. Furthermore, there seems to be no correlation between the target amount and chance of success or failure – suggesting that, if a product is strong and/or has a good management team behind it, crowdfund investors are willing to fork out whatever the cost.
Following that conclusion, crowd investors will usually recognise whether or not a campaign has a strong management team and, in particular, can spot a weak product offering; more often than not making an investment decision on the back of that information. Reasearch suggests that campaigns with gold 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 – and 35% of campaigns with a bronze rating for product were unsuccessful in their fund raising.
Modwenna Rees-Mogg, one of the report’s authors and a Founder of CrowdRating, commented:
“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. What is more revealing is the crowd’s apparent indifference to the financials. We believe there needs to be a broader industry debate about the positioning, quality, and analysis of financial information within a campaign and more discussion around if, and how, investors should be encouraged to pay more attention to financials as part of their overall investment decision making.”
CrowdRating provides independent ratings on equity crowdfunding campaigns. Using CrowdRating’s checklist-driven Ratings Engine, each campaign is systematically scored against three core criteria – Management, Product and Investment – with each category receiving a Gold, Silver or Bronze rating. To read the full report, follow the link here.
Miranda Wadham on 02/03/2016