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What happens when investors lose money on equity crowdfunding?

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What happens when investors lose money on equity crowdfunding?

Most of the leading equity crowdfunding platforms launched around 2012-2013.

That’s certainly long enough for some of these platforms to have some losses — angel investing is a game of percentages. So few companies actually make it — so, it’s important to pick the right startups to invest in and make sure you’re well-diversified if you’re an angel investor.

So, why don’t we hear of more of these losses? Why do investors only hear of the big step up in unrealized IRR after only 18 months for some of these platforms?

Or put differently, is the lack of hearing about losses more about good PR for equity crowdfunding or are there just really few losses to even discuss?

The beginning of more transparency

Well, SyndicateRoom, a competitive equity crowdfunding platform out of the UK, appears to be breaking the transparency ice. The company recently disclosed that an investment of £285,000 it made into an early-stage gaming company in early 2014 was lost.

In a sort of exit interview, SyndicateRoom  co-founder and CEO Goncalo de Vasconcelos commented on the failure:

[x_blockquote type=”left”]“As an investor-led platform we know it’s important to reflect on this business failure and to understand what it means. Equity crowdfunding is no longer the newest kid on the alternative finance block. It’s ‘growing up’ into a major source of growth capital for UK businesses and as an established asset class. Part of this ‘growing up’ is to be open and transparent about the failures – an approach we’ve been advocating for since our beginnings.” “Given the risk profile of equity crowdfunded businesses, failures are inevitable and will occur much earlier than the successes. These losses are balanced against the potential for high returns from the successes.” [/x_blockquote]

Do crowdfunding companies actually perform better?

Because investing in private companies through online platforms is only in its infancy, there isn’t a lot of data to support investor performance.  AltFi happened to work the numbers on equity crowdfunding investor performance (albeit, only on UK crowdfunding platforms) and it’s interesting to see the results.

investor performance using equity crowdfunding

The RSA estimates that 50% of companies fail to reach Year 5 (similar stats exist in the US), so from this graph, it appears that these crowdfunded companies are performing better than the norm.

It will be interesting to watch how the larger equity crowdfunding platforms (like AngelList and OurCrowd) deal with failures on the platform. And that’s the thing: startup failures are an inevitability.That’s just part of the game.

Investors should understand failure rates if equity crowdfunding is to challenge more traditional channels of investing.

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