Before you pour your life savings into crowdfunding, read this first.
Crowdfunding, investing in small businesses in the hope of a return, is terribly exciting.
From investors in Camden Town Brewery cashing in upon its multi-million pound sale to brewer AB InBev, or eCar’s similar sale to Europcar.
Especially with today’s painfully low interest rates of just 0.25%, where there’s literally no point waiting for your savings to grow in a bank account, people are actively looking for better places to put their savings.
But if you invest in crowdfunding, especially on the three major crowdfunding platforms Seedrs, Crowdcube, and SyndicateRoom, what are your returns going to be?
It’s not an easy question to answer, the crowdfunding industry has been fairly opaque in the past.
There’s also the darker side of equity crowdfunding, where failure rates are disguised and high profile businesses go under, taking ordinary investor’s money along with them.
Like gambling, there’s always a large risk.
But that began to change earlier this month, when Seedrs and SyndicateRoom began releasing detailed figures about the success of their portfolios.
There are some caveats*, but we’ll deal with them in a minute.
So, if you’re trying to decide between Seedrs, CrowdCube and Syndicate room, what could your returns be?
Seedrs became the first equity crowdfunding platform to publish a full portfolio update this month, with some of its figures audited by the accountants at EY.
Of the 253 businesses that Seedrs has helped raise funds through its platform up to the end of 2015, combined they have grown in value by an average of 14.44% per year.
So, if you had invested in every business listed since they started, you’d be sitting on a nice return.
But that’s before you include the tax benefits available to investors in small businesses.
We won’t go into the details but if you were able to claim the full tax relief of the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), your annualised returns could be as high as 41.87%.
Not bad at all.
Take a look at Seedrs figures in more detail here.
SyndicateRoom quickly followed Seedrs announcement with its own smaller set of figures this month, which were not audited by any external party.
According to these numbers SyndicateRoom’s entire portfolio has increased in value by 35% in aggregate since 2013 when it launched up to the end of 2015.
Again, when tax relief is factored into the equation, the value for an investor who has backed SyndicateRoom’s entire portfolio will have increased by some 109% over that same period.
Once crucial difference to note with SyndicateRoom is that some of its companies are larger public groups.
The benefit here is that some investors may be able to get the cash back from their investments.
Take a look at SyndicateRoom’s figures here.
By many metrics Crowdcube is Britain’s largest equity crowdfunding platform, and is certainly the one you’ve probably either heard of or seen advertised around.
Unfortunately while Crowdcube has been very public about the number and value of the fundraisings it has facilitated, the company has yet to release a portfolio update for investors in the same way that its peers have.
“Whilst we haven’t placed a value on our entire portfolio of funded businesses it’s not to say we won’t in the future,” Crowdcube co-founder Luke Lang told The Memo.
Lang pointed out that only 23 businesses of the 400+ which have raised funds on Crowdcube are no longer trading and there have been three businesses which have gone on to return more than £5m to investors after being sold.
All of this data is great, but there are three major caveats to bear in mind when looking at the figures and when considering crowdfunding as an investment.
1. The portfolio problem
All of the figures being published here are based on someone investing in every single company on either Seedrs of SyndicateRoom, which in reality no one has done.
Seedrs suggests that people should be looking at spreading their investments across at least 20 separate crowdfunding campaigns, and even then there’s no guarantee of success.
2. Mind the exit
Most of these companies are private businesses, and many will remain that way indefinitely. Your investments may very well grow in value, but that doesn’t mean you’ll ever see a penny back from them.
3. The problem with past performance
Finally all of these figures listed are based on the last three years of performance, which give no indication of future performance.
So what does this all mean? Crowdfunding remains a highly speculative, highly risky investment.
As we’ve written before, chances are you’ll end up loosing the vast majority of money you invest.
If you have decided to put some of your savings into crowdfunding, at the moment SyndicateRoom appears to have the best performance on paper, along with the added benefit of some of its investments being public companies.
But, as always, buyer beware.
UPDATE 2016-09-30 – Changed to clarify that SyndicateRoom’s portfolio data analysis was from 2013 until the end of 2015, not May 2016. Updated to clarify that Seedrs’ portfolio analysis was based on annualised returns, as opposed to aggregate returns as SyndicateRoom’s results were.