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How crowdfunding is exposing bad professional investors

rise of crowdfunding rise of crowdfunding
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James Cridland

The rise of crowdfunding has democratized investing and created another stream of capital for entrepreneurs. Jeff Lynn, CEO of one of the leading platforms, Seedrs, explains how.

A simple Google search provides a number of statistics supporting the rise of crowdfunding in recent years.

One that stands out stems from a study conducted by the World Bank, which suggests that the global crowdfunding market could reach between $90 and $96 billion by 2025.

That would amount to roughly twice as much as the global venture capital industry today.

A staggering number given that investing in startups and entrepreneurs was, until very recently, only accessible to people with deep pockets.

The democratization of such pursuits is one of the major benefits of the rise of crowdfunding.

The growth of now world renowned platforms, including Kickstarter and Indiegogo, has given thousands of non-professional investors the opportunity to back startups they deem to be attractive.

This also creates a previously untapped stream of capital for startups, whilst acting as competition for the angel investing community and potentially the larger investment institutions as well.

Hot Topics sat down with Jeff Lynn, CEO of Seedrs, one of the UK’s leading crowdfunding platforms, to discuss the factors behind the rise of crowdfunding, his thoughts on professional investors and his advice on building a successful crowdfunding campaign.

Hot Topics: Why do you think we have seen such a widespread rise of crowdfunding platforms in recent years?

Jeff Lynn: There are two answers to that. One is that it solves a profound market failure that needed fixing.

On one end you’ve got large numbers of businesses that need equity capital, and are either too early for classic venture capital or simply don’t fit the venture profile.

There are hundreds of thousands of nascent entrepreneurs that have the potential to build great things but did not have access to capital.

On the other side, you have loads of people who want to be able to invest in these types of businesses but doing so offline just isn’t viable unless you are investing vast amounts of money.

Historically, the two never came together and that’s market failure when you have demand and supply that aren’t meeting. We, and some of the other platforms, saw an opportunity to fill that gap, which has led to the rise of crowdfunding.

The other way of looking at this, is that this is part of the natural progression of financial services.

One of the things we’ve seen over the last century or so is more and more asset classes being democratized.

100-125 years ago having a bank account was the preserve of the rich. Over time the banks, property, stocks and shares and all sorts of asset classes have opened up.

Particularly as the digital revolution has made it easier to be able to handle large volumes of small transactions, we’re seeing that process continue to progress.

The rise of crowdfunding is one part of that narrative.

Even in the VC community, for every institution that does a good job, there are so many funds out there that don’t have a clue what they’re doing.

HT: How have professional investors, be it angels or institutions, reacted to crowdfunding?

JL: It depends on the individual. There are a wide range of ‘professional’ investors. There are the people that are actually good at what they do and really add a level of value, whether it’s alpha in terms of being able to pick out performers or whether it’s a level of support that they are able to bring to the table.

That group has tended to be very supportive of, and welcoming towards the rise of crowdfunding. We act as a very good compliment to what they do.

They don’t feel particularly threatened because they bring a different type of value into the equation. They have seen a lot of good ways for us to work together.

For every one of them though, there are a lot of people who call themselves professionals but really aren’t.

I am particularly cynical of much of the angel investment community that bangs on and on about how much value they add and frankly it’s a whole load of crap.

Not only do they not add value, they are positively value destructive.

They go on to the board of companies and give terrible advice. They’re self-satisfied because they’ve had success in some completely different industry.

They know nothing about what the business is doing and they give the entrepreneur horrible value add.

Even in the VC community, for every institution that does a good job, there are so many funds out there that don’t have a clue what they’re doing.

For the most part, those types don’t really like us because they’re being found out and the game that they’ve tried to play has started to be undermined.

We’re perfectly happy with that though.

HT: Is that disparity in quality a global issue or just in the UK?

JL: I think it’s global. I guess what I would say is that Silicon Valley is a very different place to the rest of the world.

Unfortunately, people assume that a lot of the paradigms that get set in Silicon Valley apply to the rest of the world, and they don’t.

The Valley has a vast number of highly experienced investors. It contains people that have been through the entrepreneurial journey themselves, have made it work and can add massive value.

It’s pretty much the only place that has that kind of concentration of great investors.

Even in other major cities, you tend not to have that.

There is a small group of experienced former entrepreneurs and then a lot of fakers.

I don’t think it’s unique to London. I think it is a feature of almost every ecosystem outside of the Valley.

HT: Is there a perception that trying to raise funding through crowdfunding is a sign of weakness and that professional investors weren’t interested in the business?

JL: I think there was that perception when we first launched. But the rise of crowdfunding has proven that not to be true for a couple of reasons.

Firstly, the vast majority of businesses that come to us are too early for VC. If you’re not within a VC’s investment thesis or you’re not within their investment range, the fact that they haven’t invested in you doesn’t say anything.

Those businesses that are at VC level tend to have a very clear reason why they’re using crowdfunding. They want their ‘x’ number of customers to invest in them rather than rely entirely on venture capital.

I think increasingly the potential selection bias has not come to bear and that actually there probably has been something of a positive selection bias with the rise of crowdfunding.

The businesses that are confident enough to put themselves out there, and go out and hustle and build a equity crowdfunding round have often tended to be the ones with more potential rather than less.

HT: What are the factors in making a successful crowdfunding campaign?

JL: It’s a combination of things. Obviously the business itself and the way it is presented are very important.

People’s attention spans online are short and being able to convey the story and growth potential quickly and in a compelling way is vital.

If you get too far into the weeds of technicalities, that may work with some highly detail focused investor but it tends not to work as well online.

It’s more about a great video, or imagery.

The second key bit is hustle.

Crowdfunding is hard work and one of the things that people often misunderstand is that you don’t just put up the listing and then wait for people to come and fund you.

We are, more than anything, a tool for you to go into your networks and the public and get them excited about your deal.

We often say to entrepreneurs that, “if you come at this expecting that you’re going to have to find the majority of the investment, you’ll find that a lot comes from our network as well.

However, if you expect us to be the one providing all the investment, you’re not going to raise a thing.”