The study came from February-launched equity crowdfunding service Growthdeck, which sought to highlight the tricky challenge investors have when it comes to understanding the strength of the business opportunities before them.
The company looked across six British crowdfunding platforms – including Crowdcube, Seedrs, AngelsDen, GrowthFunders, SyndicateRoom, CrowdBnk – and found that just nine of 115 companies looking for investment are profitable, according public company accounts.
By comparison, 41 companies (equivalent to 36 per cent) have not yet filed account details with Companies House.
As a result, Growthdeck’s co-founder Gary Robins suggested that existing platforms should be more selective of the businesses they approve, so that stronger investment opportunities with lower risks are provided.
“Crowdfunding can be a great way for individuals to dip their toes into growth company investing, but this shows they need to choose carefully. Clearly crowdfunding platforms need to be putting forward more robust and profitable businesses,” said Robins.
The Growthdeck boss boasts 30 years of experience within private equity. He plans to solve the problem by incorporating investment evaluation and due diligence into the platform, inclusive of long-term business growth viability.
Robins recommended that investors don’t get caught up in exciting opportunities, given that there’s a serious question mark hanging over the value of crowdfunding companies.
He also said that investors shouldn’t rely on the platforms they’re using for transparency and background checks, and called facts on investment seekers “thin on the ground”.
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“Although investors may be attracted to invest in businesses where they see significant potential despite a lack of track record, too much exposure to early stage businesses could be a risky strategy,” he said.
“Whilst many of the most successful tech companies were unprofitable at the point of receiving early-stage funding, our finding that such a large proportion of potential investee companies in a wide range of sectors across the board are unprofitable or have no trading history is a concern.
“Investors need to have confidence that the crowdfunding platform they are using has done extensive and thorough background checking on all of its investment prospects. Cost constraints and differing levels of professional expertise mean that this cannot simply be taken for granted.”
While many of these companies may be lacking in profits, campaign runners often have no shortage of imagination – we found this out by highlighting the five most outlandish crowdfunded business ventures.
Image: Shutterstock
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