Business angels and investors have serious doubts about the financial strength of many of the companies pitching for crowdfunding deals.
Valuing a startup business is always a problem for entrepreneurs and investors, but new research shows that from more than 100 firms seeking crowdfunding investment across six platforms only around 8% are showing a profit.
A third of the companies have filed no accounts with Companies House, says new crowdfunding platform Growthdeck.
The lack of financial information leaves investors with little to work on when they are considering whether to take a stake in the business.
Business values questioned
Other traditional methods of valuing a business are also redundant if an investor has no financial data to work with – such as valuing assets and ratios based on income generated.
HM Revenue & Customs (HMRC) runs a pre-approval process for startup companies under the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), which looks at their business plans but makes no investment judgment
Two high profile collapses of large crowdfunded pitches have also rocked the UK market recently.
Law firm Rebus, which raised nearly £820,000 through Crowdcube last year while showing a loss of £1.4 million on the books has called in the administrators, while mini drone maker Zano went to the wall after picking up £2.3 million from Kickstarter.
Problems with crowdfunding
Growthdeck is run by experienced fund manager Gary Robins who argues the time has come for investors to approach startup pitches with a stricter, more forensic examination.
“Crowdfunding undoubtedly helps put entrepreneurs and investors for some great opportunities,” he said.
“But crowdfunding platforms need to look more carefully at the financial backgrounds of the businesses they are putting forward
“We found that a real question mark hangs over the value of the companies that are asking for backing and what they are doing with the funds they raise.”
Putting too much money into incubator businesses is a risky strategy, robins explained.
“Our investigation showed that many tech companies were not showing a profit at the seed stage but carried on to be profitable, but it’s worrying investors are making decisions based about unprofitable businesses or those without any track record.”