I’m sorry for the rude headline, but it’s time for a bit of honesty about these new crowd-funding platforms. Because, as deftly expressed by Andrew Orlowski at The Register, “what crowd-funding really does is take the ‘find a bigger idiot’ principle and add internet-scale economics to it”. And I’m not sure that, in the long term, these platforms are a healthy addition to the funding landscape.
To explain what I mean, let’s take a look at the report Seedrs itself offers up to potential investors for digestion, a study commissioned by the British Business Angels Association and NESTA – setting aside for a moment the obvious and glaring vested interests both bodies have in promoting new forms of angel investment. Now, what’s funny is that this report actually sounds a number of alarm bells about what Jeff Lynn’s start-up for start-ups is trying to do – not that Seedrs draws any attention to these reservations.
The study is based on feedback from 158 angels, all of whom, as far as we can tell, are members of investing groups: that is to say, they’re all successful, and in some cases professional, investors. So its findings can’t be extended to all investors – and particularly not to the poor half-wits pouring money into projects via Seedrs, which is set to offer mom and pop cash burning services on a massive scale.
“Angels with entrepreneurial experts outperformed those without it,” writes the report, confessing that “most [angels in the study] had also founded several new ventures themselves” before going on to explicitly warn that “someone without entrepreneurial experience should be particularly careful investing in extremely early-stage investments”. I’ll say: as an asset class, European venture capital has become so risky and hopeless for all but the best that it’s now routinely propped up by taxpayer cash.
The report makes it clear: when highly-skilled entrepreneurs invest in a balanced portfolio of start-ups, 40 per cent of them lose money overall. Dare we even ask what the figure looks like for amateurs with no experience of tech start-ups? And, not to be discourteous, but do Seedrs investors appreciate the likely ramifications of having their investments curated by former lawyers, corporate governance bods, IT consultants and marketing executives?
Statistically, the way to maximise success, according to the report, is to “stay connected to your expertise; do due diligence; post-investment interaction; do not make follow-on investments”. Most of these do not apply to Seedrs investors – indeed, some of them are even precluded by its model.
“9 per cent of exits produced nearly 80 percent of all the positive cash flows,” says the report. But “all of the results are based on exited investments only (there are no estimated returns or carried values)”. In English, that means that the huge class of investments that never return any money, and instead simply limp on pathetically, are not even included in the report’s calculations.
Here’s another question: do entrepreneurs, and the ecosystem in general, even benefit all that much when lobbed money with no investment or entrepreneurial expertise behind it? Some might say the more money around the better, but such people tend to be venture capitalists enjoying comfortable management fees, to whom second-rate funds are a useful source of extra cash, enabling them to do more deals with less money.
Seedrs itself isn’t a bad business: it creams off a whopping 7.5 per cent of any money successfully raised on the platform – and takes the same percentage from any returns. But while start-ups are getting a new funnel of dumb money and Lynn is making some very tidy fees, the poor bastards who have watched Pebble from afar in awe (and who now, taken in by Tech City’s bluster and bullshit about east London start-ups and anxious for a quick slice of the pie, are anxious to chuck their savings into execrable internet projects) are about to lose their savings.
It might not just be them getting into trouble. Companies like Seedrs should “get ready for an avalanche of shareholder suits 10 years from now, since post-factum civil litigation will be the only real regulation of the start-up market,” according to Matt Tiabbi, the man who came up with the image of Goldman Sachs as a “giant vampire squid wrapped around the face of humanity”.
As an amateur with a bit of extra cash to hand, you’ll get more bang for your buck lighting up your Cubans with hundred dollar bills than logging on to Seedrs. You have been warned.