Crowdfunding – Today & Tomorrow #ACAAngelSummit15

Angels Connect NZ series – Chris Twiss from NZVIF reports from ACA Conference 2015

There was a palpable tension in the room between equity crowdfunding operators and traditional Angel groups/operators for Track 1 at the ACA Conference.

Setting the stage Bill Payne outlined how crowdfunding has been reported in the media as everything from ‘the end of the road for Angels’ to being ‘doomed to failure’ itself – which explains the tension.

For some more concrete perspective Bill began his presentation by laying out some facts and figures around current crowdfunding activity in the World, US and UK/Europe for all forms of crowdfunding; Donation based; Rewards based; Lending based; Real Estate based (Equity and Debt); and finally Equity Crowdfunding (EC) which can either be from accredited and/or unaccredited (i.e. the general public) investors.

Quoting figures from Tabb Group;
– total crowdfunding worldwide in 2014 ran at about US$10bn.
– the bulk (60%) came from US, 30% from Europe followed by Oceania at 3%
– by far the biggest category stateside in 2014 was lending based crowdfunding (50% of the US total of $8.0bn or so)
– a mere 5% of the total investment was Equity Crowdfunding, which at @$0.3bn was only 2% of the size of the US Angel investment market
– In the UK, where equity crowd funding to the public is permitted (it still isn’t in the US) equity crowd funding is a relatively small proportion of the total amount of early stage funding activity. Bill suggested, based on this data, that it is therefore not obviously “taking off” – at least not yet.

Having delivered the numbers Bill gave up the stage to Matthew LeMerie an ex McKinsey analyst now working with the Keiritsu Forum who outlined some scenario planning work that he had recently done on the likely near future of EC.

The overall outcome the scenario planning identified two critical uncertainties for EC.

First, the regulatory environment – and within that the question of whether it will become more or less supportive in the future; and second, the failure rate in EC (i.e. numbers of companies funded though EC that will fail).

Matthew’s personal view was that the regulatory environment will get less supportive for EC overtime – largely because regulators will find that they have been too “lite” with the current regulatory settings.  The antcipated outcome is this will lead to the significant consolidation of EC operators and the emergence of a small number of big players as the hurdles end up becoming too great for small and even mid-sized operators to cope with.

Speaking to the second point the predicted uncomfortably high rates of “failure” will manifest because the key things that need to be done to mitigate that risk when doing this type of investment (i.e. appropriate levels of DD, strong terms setting  – including appropriate valuations, and post investment monitoring etc) will not be done well enough by the majority of EC platforms.

There will be winners and losers. The winners will be those able to demonstrate that they have robust risk mitigating processes in place and, critically, be totally transparent about their failure rates.

Mathew’s analysis was crowdfunding is still a fairly/very modest part of the early-stage funding landscape, and the EC market overall is in borderline wild-west territory in terms of current levels of integrity of process and overall risk mitigation for investors.

Those views were explored further by the third presenter from Seedrs (UK based EC platform) CEO Jeff Lynn. In the ensuing Q&A he passionately rebuked much of what had been said before.

In short, Jeff’s view was in general the future impact of EC was totally underestimated – and disruptive to the current Angel investment models being practiced around the world. He believes that EC has the potential to deliver better investment returns.

Why? The answer was not clear, maybe because having 300 extra people to help your company out leads to greater investment outcomes – right?

And so the debate continued… the crowd shuffled out of the room, ready for the next instalment of it, somewhere nearby, a few sessions later.

 Chris Twiss

 

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