Does crowdfunding really offer attractive returns for investors?

Research shows that investors are putting more money than ever into crowdfunded businesses. But does the sector really offer attractive returns, asks Ben Lobel

If a business needs finance to expand, improve facilities or purchase new equipment, it can either seek to borrow money or ask for capital investment in return for equity, i.e. shares.

But while sources of equity finance used to be restricted to the likes of angel investors and venture capital trusts, today equity crowdfunding operators such as Crowdcube, Seedrs and Angels Den have emerged to enable businesses to raise money online from large numbers of individuals, each making relatively small investments in the hope of scoring a healthy return in the event of an IPO, merger or exit.

As an investor, the process is usually straightforward. Often it’s as simple as signing up to a website, browsing the video and written pitches available, and then choosing what to invest in and how much. Once the legal documentation is completed, you will become a shareholder in that business, be sent a share certificate and appear on the business’s share register at Companies House.

It’s a formula that is proving popular. Today, there are 235 live crowdfunding platforms in the UK, according to data from finance analyst TAB, and investors’ appetite for crowdfunding businesses has grown considerably since 2015, statistics from Businessagent.com reveal. So far in 2017, the average monthly cash injection from all investors across all equity crowdfunding platforms is £13.5 million, compared with £7.4 million in 2015, with a monthly high of 11,202 investors contributing to 93 projects in May this year.

Jon Medved, CEO of crowdfunding platform OurCrowd, says the advent of such organisations has disrupted the way that start-up companies are funded, democratising both sides of the marketplace, meaning investors and entrepreneurs. ‘By opening up opportunities to investors from around the world, the phenomenon is breaking down the geographical barriers that plague many start-ups, particularly those in areas where VC funding is not plentiful,’ Medved says.

For businesses, crowdfunding can represent a welcome source of free publicity in addition to funds. But to what extent does it present an opportunity for investors in 2017?

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