Crowdfunding investors make choose where to stake their cash based on people and products rather than financial performance, claims a new report.
CrowdRating, an independent pitch assessment agency for investors putting cash into equity crowdfunding, has published a report examining how people choose their investments.
The report reveals that investors quickly spot whether a company has a good management team or a weak product and generally make a speedy decision about buying in based on those facts alone.
The conclusion came from scrutinising 155 crowdfunding campaigns rated by the company ion 2015.
The data also showed a company’s valuation influenced whether the fund-raising round was likely to succeed.
Bigger companies raise most money
More than 70% of companies with a £5 million valuation were successful, while only half of those valued at less than £5 million hit their targets.
This followed through to seed stage investments, which accounted for 46% of the rated companies. Companies with higher valuations tended to raise more finance than those with lower valuations.
The surprise takeaway was how few investors took notice of a company’s financials before investing.
CrowdRating argues investors need better information about potential deals – and that this information should come from an independent source applying consistent analysis principles so each pitch can be easily compared.
“We were not so surprised to find investors look at management teams and products when they assess a pitch because so many crowdfunding platforms focus on these points,” said CrowdRating founder Modwenna Rees-Mogg.
Independent valuations needed
“More surprising was investors appear indifferent to a company’s financial track record.”
Rees-Mogg argues the crowdfunding industry should highlight financial information provided by entrepreneurs.
Other industry experts warn that crowdfunding entrepreneurs may overvalue their business and investors should pay more attention to financials.
“We have heard that some companies go for crowdfunding rather than down other alternative finance avenues because they can dictate their own valuation,” said a spokesman for data firm Beauhurst.
“Many entrepreneurs can release fewer shares and raise the same amount of money through crowdfunding than if they went to business angels or venture capitalists.”
The warning comes after two crowdfunding projects that raised hundreds of thousands of pounds went bust.