Investing

Is crowdfunding better than a bank?

By Oliver Smith 8 November 2016
Summary

Probably not, but it's starting to show impressive returns.

Crowdfunding is a game of hits and lots of misses.

But since 2011 new data suggests that businesses which have crowdfunded have performed “impressively” and “thus far the survival rate is impressively high”.

That’s according to industry data group AltFi which this morning released a comprehensive report into the status of all the companies that have ever crowdfunded: Where are they now? 2016.

In it AltFi reveals that since 2011 there have been 955 crowdfunding rounds, from 751 companies, across platforms like CrowdCube, Seedrs, SyndicateRoom and others.

Read more: Crowdfunding? This is where to put your dough

Of these businesses that have raised funds from ordinary investors, 88 have formally stopped trading, while 79 are showing signs of distress.

The vast majority are still trading and are growing in value, and if you’d invested across every business that has crowdfunded since 2011 you’d be earning an annual return of 8.55% on paper.

Compare that to the 0.25% that most easy access savings accounts are offering, or the 2-4% you’ll get if you lock your money into a longer-term saver, crowdfunding appears to offer a good return compared to your bank.

The big caveat here is that crowdfunding’s cash returns only appear if the businesses you’ve backed actually sell to another business or float on the stock market.

Of AltFi’s 751 crowdfunded busiensses they examined, only five have exited and given investors their initial capital back plus a premium.

Plus unless you’re spreading your investments across hundreds of crowdfunding campaigns, you’re still at high risk from betting on one of the 22.2% of these businesses which have failed or are at high risk of closure.

Read more: The good, the bad, and the ugly side of crowdfunding

But ultimately AltFi – maybe unsurprisingly for a business itself built on crowdfunding data – finds crowdfunding a worthwhile investment opportunity.

“Our conclusion on the face of the data is that these results are positive. At this stage the success rate of crowdfunded
companies is impressive…”

“Whilst there have been concerns that valuations can seem generous, and that disclosures may not meet the standards required by professional investors in early stage companies, thus far the survival rate is impressively high.”

For most people investing in crowdfunding is probably still a gamble – take a look at our guide on where to put your money for more detail – but this new data shines a more light on this growing investment industry.