When mobile payments company Droplet raised more than £500,000 in May 2015, the investors who stumped up cash through crowdfunding platform Crowdcube might have been forgiven for thinking that they were on to a good thing.
The investment pitch boasted of 30,000 users across 600 businesses and a five-star rating for its payments app. But reality came crashing in just 14 months later.
“We never got to the scale to make Droplet viable as a profit-making business,” said co-founder Steffan Aquarone. The company is still trading and Aquarone has a new plan to make a go of it, but its app has been removed from sale.
Droplet’s fate hints at a conundrum at the heart of the crowdfunding model: how can investors be protected while ensuring that a growing source of finance for start-ups does not dry up? Some of the answers will come in early autumn, with the publication of a long-delayed review into the rules of crowdfunding by the Financial Conduct Authority (FCA).
The watchdog is unlikely to pull any punches: it has already said it can be difficult for investors to assess the risks and potential rewards.
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A string of high-profile collapses, including claims management business Rebus and food delivery start-up Pronto, has seen pressure mount for better regulation of an industry that some feel misleads small-time investors.
“In some cases, it is just too easy to raise funds,” said Aquarone, now 33.
Critics of crowdfunding say some form of action is crucial following a series of scandals. Last year, it emerged that Rebus had hired restructuring specialists Resolve to address a cashflow crisis — a fact not disclosed when it raised more than £800,000 on Crowdcube. The company subsequently collapsed, wiping out investors’ cash. Luxury shoe maker Upper Street went into administration last year not long after raising £244,000 on Seedrs, another crowdfunding site.
“The onus must be on the platforms to be more transparent about the businesses pitching for investment,” said Adam Tavener, chairman of Alternative Business Funding, which helps small companies find financing.
Despite the calls for greater scrutiny, there is no doubt that crowdfunding is a valuable source of finance for small businesses. In the past year, £200m was invested in fledgling firms through the top four funding sites, according to Beauhurst, a market researcher.
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Three years ago, brothers Adam and Daniel Pike co-founded Supercarers, an online service that connects professional carers with those in need of care. The business raised £1m on Seedrs last year, including an investment by JamJar, the fund run by Richard Reed and fellow co-founders of Innocent Drinks. “The challenge is that you have to be candid about your business,” Adam said. “The fact that the FCA is looking at the industry is a sign that it is improving.”
Supercarers is unproven, but there have been some notable successes. Camden Town Brewery raised nearly £3m through crowdfunding before selling out two years ago to Anheuser-Busch InBev, the world’s biggest beer company, in a deal thought to be worth £85m. Scottish accounting software company Freeagent raised £10.7m when it listed on AIM last year. It, too, had roots in crowdfunding.
Crowdcube and Seedrs, which together account for about 70% of total crowdfunding investment, say companies who list on their platforms must go through a rigorous due diligence process.
Concern within the industry is now mounting that the FCA will impose stiff regulations that will only serve to reduce the availability of finance to start-ups.
“I think the FCA understands the importance of equity crowdfunding,” said Luke Lang, who co-founded Crowdcube in 2011. “They don’t want to stifle the progress. They are committed to innovation.”
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The crucial question for the watchdog is whether investors are made sufficiently aware of the risks of parting with their money.
For Aquarone, who is now attempting to find success with Droplet in America, it is a case of natural selection.
“You can’t stop stupid people from investing,” he said. “The sheer chance of failure needs to be hammered home.”