Facebook’s £1.2 billion buy-out of crowdfunded start-up Oculus has shocked investors who won’t receive a penny for helping the firm get off the ground.
Oculus VR makes 3-D virtual reality goggles – and so far has not shipped a unit for sale as the product is still in development.
The start-up cash came from crowdfunding – which is a group of investors pooling small pledges of cash in response to an online business pitch from an entrepreneur.
“The deal calls into question the buddy system for crowdfunding, which is like a charity appeal asking for donations in return for some free merchandise or a mention on a web site,” said Stuart Smith of investment web site seis.co.uk.
“If we are going to see billion pound deals from crowdfunded start-ups, investors are bound to ask what they get in return for their cash and will probably think a T-shirt or merchandise as a sop isn’t enough.
Entrepreneurs taking advantage
“This deal could throw a real spanner in the works for crowdfunders.”
More experienced investors are likely to plough their cash into a more organised platform like the Seed Enterprise Investment Scheme (SEIS), which offers tax breaks in return for an equity stake in a start-up.
“At least investors in UK firms that take a shareholding have a say in how the company is run and can sell their shares at a profit – or if the firm fails, set off the loss against other taxable income,” said Smith.
“Crowdfunding has a place in financing businesses, but the reason why regulators in the US, UK and Europe are stepping in to tighten up the rules is because entrepreneurs are taking advantage of inexperienced and vulnerable investors who do not realise that someone else is making a killing off their cash and cutting them out of the deal.”
Go for control with a SEIS
The website explained that crowdfunding raises millions of pounds worldwide for start-ups and many are offering little in return.
Even if they do offer an equity stake, this is often diluted when the entrepreneur goes to venture capitalists for more money.
“Crowdfunders are charitable people and have the best of intentions, but they have no control over how their money is spent and gain little out of the transaction when entrepreneurs can manipulate their companies to make big bucks and offer nothing in return,” said Smith.
“For investors with a few thousand in the bank who want to speculate on new start companies, SEIS offers more solid tax breaks, more control and an exit route that gives a share in any profits.”
