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In Crowdfunding, It’s the Fundamentals That Matter — Not Famous Faces

posted Oct 8, 2014, 12:40 AM by J Shaw   [ updated Oct 8, 2014, 12:40 AM ]
There have been some illustrious additions to the crowd in recent times. Nicola Horlick was one of the first high-profile figures to endorse crowdfunding, and Better Capital boss Jon Moulton and serial entrepreneur Sir Stelios Haji-Iannou have both turned to crowdfunding to find seed finance for their respective new ventures.

Those who follow crowdfunding will be well aware of the recent discussion on the merits of using celebrity-driven brand credibility to drive crowdfunding raises between Moulton and Sir Stelios. Arguments aside, however, having a recognisable name attached to a fundraising round can yield better results. Many people trust their endorsement, though this alone should never sway someone to invest. It is the fundamentals of a business that matter – whether the numbers stack up, what revenue is generated, the management, and what the company’s prospects are for the medium and longer term.

Responsible investors ask difficult questions of a potential deal, and check the foundations upon which an entity is founded. The best crowd platforms go one step further and help them with this sometimes complex process. At CrowdBnk, we have our own due diligence Bootcamp, which helps us separate the wheat from the chaff.

In this sense, while the brand value derived from celebrity credibility can offer one type of trust for investors, it is by no means the only measure a savvy investor should look to. One crucial element to consider is valuation. Let us take the example of Haji-Iannou’s new start-up, a budget online estate agency called easyProperty.com. So far, it has raised more than £1.4 million via Crowdcube. Originally, easyProperty was aiming for £1 million in exchange for 1.5 per cent of equity. That values the entire business at almost £67 million. Not bad for a nascent company.

Sir Stelios likens the enterprise’s attempts to raise money to similar efforts by Airbnb and ride-sharing service Uber. But one of Airbnb’s earliest fundraising rounds through Y Combinator in 2009 yielded just $20,000 (£12,300). Why? At the time it had few customers and little material business. Only when the website had booked 700,000 nights and was operating in 8,000 cities was it able to raise serious funds.

This is not to say that one should shun investing in a new business because it has yet to build up a head of steam. There are great opportunities for those with the vision to recognize the probable successes of tomorrow, and the conviction to support them at an early stage. This is exactly what crowdfunding was designed to enable small investors to do. It would just be wise for people to gather all the facts, and to go into each and every investment with their eyes wide open.

I believe the argument about whether famous people have a place in the crowd is, unfortunately, a distracting one. What really matters is that all involved are sufficiently informed. If well-known people attract more investors to crowdfunding, then so much the better.

Ours is a young industry, and it needs its champions. However, when investors arrive at our door — they must be encouraged and supported to do the necessary groundwork before investing. Our industry must ensure the businesses we put forward are thoroughly vetted and credible. In the end, it is always the numbers — and not necessarily the personalities — that should count.

Posted from: http://www.wired.com/2014/10/crowdfunding-fundamentals-not-faces/