Crowdfunding: annual returns of 14 per cent, but one in five firms fail

Equity crowdfunder Seedrs has published its first portfolio update, covering the deals done from launch in July 2012 to the end of 2015.

Seeders said to the end of July 2016 these deals delivered an average 14.44 per cent annual return.

Adjusted to take account of the generous tax breaks available from enterprise investment schemes, this figure rises to 42 per cent.

The report, which uses valuation procedures in line with the private equity industry guidelines, is the first industry analysis of crowdfunding deals and returns.

INTERESTING INSIGHT

As such it provides an insight into an investment opportunity which until now 'has been based mostly on hope and expectation', rather than quantified returns, according to Seedrs chief executive Jeff Lynn.

Crowdfunding has taken off in recent years and has attracted money from celebrities, including Andy Murray and Kevin McCloud, the presenter of Grand Designs.

Murray joined the Seedrs platform last summer. Among his investments is Tossed, a salad bar chain mainly focused in central London.

Seedrs' new report covers only three and a half years of crowdfunding deals - which could typically run for five to seven years before investors can expect to get their money back through a trade sale or some other form of exit.

The returns shown are therefore only notional valuations at this stage, but Lynn says they provide 'a genuine reflection of the current value of investments'.

He makes the point that even though many of the start-up companies that obtain funding through Seedrs will fail or struggle, the strong performance of those that succeed more than make up for those disappointments.

Just under 20 per cent of the 253 deals covered by the report failed, highlighting the risks associated with crowdfunding.

Seedrs' report shows several interesting trends in the early-stage equity space. One is that while it is strongly associated with technology-based business start-ups, the reality is that there's a much broader range of businesses looking for funding through the crowdfunding route - and being successful on the back of it.

STRONG PERFORMING SECTORS

Thus the three most popular sectors, out of the 15 covered by Seedrs, have been Food & Beverage, Finance & Payments, and Travel, Leisure & Sport, each attracting around 10 per cent of deals.

Similarly, the strongest performers to date have been Food & Beverage, with annualised returns of 23 per cent, strongly outpacing the overall average, followed by Home & Personal and Finance & Payments, on 18 and 17 per cent respectively.

Further, firms using a mix of digital and non-digital elements in their business have outperformed both pure non-digital businesses and pure digital businesses.

Another point flagged up by the report is that active investors - defined as those individuals who have made more than 20 investments and therefore have a reasonably well diversified crowdfunding portfolio - are marginally outperforming the wider crowdfunding market, with yearly returns of 15 per cent.

However, the most successful of those active investors are achieving average annualised returns of around 25 per cent, which Lynn points out is comparable with conventional strong venture capital performance.

'A market-wide internal rate of return of 14.4 per cent is significantly higher than what can be expected from most other asset classes. That, of course, is how it should be: this is a riskier and more illiquid asset class than most, and the returns need to compensate for that,' comments Seedrs.

The Financial Conduct Authority remains very cautious about equity crowdfunding. It warns on its website that crowdfunding is a 'high-risk investment activity' and that consumers should be aware that it is 'very likely' that they will lose all their money.

'Most investments are in shares or debt securities in start-up companies and will result in a 100 per cent loss of capital as most start-up businesses fail,' it says.

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