Many platforms boast about the millions of dollars or pounds they have raised, or even the number of companies they have raised for. But does that really mean they are successful? Does that mean they have you, the investor’s, interests at heart? What is true success in the world of crowdfunding?
After several years of growth, statistics for crowdfunded ventures are beginning to paint a fairly poor picture for the sector. The sad truth is that for all the hype around this exciting space (and it is exciting), there have been very few exits and therefore little in the way of returns for investors.
And that is what the true measure of successful crowdfunding should be. Successful exits and returns for investors.
It can’t be about the amounts of funds raised or the number of successful raises. That’s all just marketing hype, designed to lure an uneducated and easily-led crowd to investment disaster.
And that’s the potentially fatal mistake the industry and, through naivety, the crowd are currently making.
What happens when investors get tired of losing money through crowdfunded investments? The answer to that is simple. They will walk away and the sector will die!
Platforms have a lot to answer for right now. How dare they lure an unsuspecting, uneducated and “childlike” crowd to investment suicide!
Where is the education?
Where is the pushing back of insanely large company valuations?
Where is the due diligence on the companies being promoted via the platforms?
Where is the transparency with investors?
How can adequate due diligence, be performed by a platform, on the 20 or so companies it promotes at any one time?
The truth is that all of the above is sadly lacking in the sector and it needs to change, if the space is to have a long term and sustainable future.
And if the platforms think they don’t need to change and address the above, they are forgetting one thing. The crowd still has the ultimate power to ensure that things do change – one way or another.
Ultimately, crowdfunding will live or die by the success of the crowd – not by the perceived success of the platforms and the amount of funds they’ve raised, or the number of companies they’ve raised for.
The space will only survive if the crowd has more wins than losses. And that means delivering far more successful exits and returns than the current norm.
The only way platforms can start to deliver this success, is by changing the focus from quantity to quality and by putting a halt to the herd-like marketing techniques that many currently persist with.
Education of the crowd is also vital. The crowd needs to understand the risks involved, as well as the basics of what a decent business investment proposition looks like; rather than being lulled into a false sense of security by clever marketing tactics that prompt them to follow others in the crowd… like a bunch of lemmings to the slaughter!
So, crowd investors, please… before you make a commitment to invest via a platform, take a step back and really consider the proposition. Ask yourself these questions:
- Am I prepared to lose this money?
- Do I really think the company is worth x?
- Does this company have a plan to get my money back to me?
- Are there some experienced investors already backing the company?
If the answer is “no” to any of these, scroll on to the next opportunity. Because while simply “following the crowd” might be boosting the success of the platforms, it certainly doesn’t guarantee success for you.
And that is what true crowdfunding success is.
By Jason Kluver is COO of Shadow Foundr the Private Investor network and equity crowdfunding platform