Equity crowdfunding: stealing candies from kids?

News of HR startup Skillific running out of money just 6 months after closing one of the most successful equity crowdfunding campaigns in Estonia was a stark reminder of risks involved in the new booming industry.

The topic is a difficult one as we love crowdfunding, we have run one campaign ourselves and early successes of Invesdor and FundedByMe have turned equity crowdfunding a phenomenon in the Northern Europe. However, the Skillific case shows there is a reason why regulatory officials are worried over amateur investors putting their money into high-risk instruments.

“Investing in startups is very risky, highly speculative, and should not be made by anyone who cannot afford to lose their entire investment,” says Wolfprint 3D in the risk description of its funding campaign on Seedinvest.

In a way, the industry has regulated mostly itself: a typical company raising capital on an equity crowdfunding platform is actually a relatively established small company — they have their products on the market and have often made money, some of them for many years.

When Funderbeam, the Estonian platform which allows also trading of investments, launched last week a new venture with Zagreb bourse it stated clearly. “The target companies are ones who have already proven their product/service market fit.”

Rarely the companies running equity crowdfunding campaigns are actually software startups like Skillific, which might be still looking for their business model or being far away from testing the product on the market.

Is there a solution?

So how equity crowdfunding platforms could solve the problem? Should they ban early stage startups? There are a few options: platforms could demand the companies cash flow, or they could demand the involvement of a strong professional investor – in that case only a part of the investment would be raised from the crowd.

Some of the solutions do creates another one — the more established firms or business ideas they are looking for, the less they are novel financial platforms – they would become like syndicating platforms for business angels.

Would this be a good development? It would surely be safer for me and you to invest the extra 100 euros through crowdfunding, which is often a good development. At the same time, it would remove some of the highest growth-potential from the sector.

And that means also RISK. The classical saying goes that 9/10 startups fail, some investors actually write down immediately any investment they make into startups. Considering that, equity crowdfunding platforms have done really well so far in picking the cherries, but also investors have been ignoring the highest-risk cases. For example,
Funderbeam launched with 5 projects, but of these, only 3 got funded.

Should unproven startups be eligible to raise capital on an equity crowdfunding platform? Not necessarily, but surely the final rules are up to regulators and the platforms themselves.

At the same time, we do hope the new industry recognises that raising money from the crowd is sometimes like taking  candies from a child.

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We ran our own perk-based campaign in early 2015 to launch CoFounder Magazine to the world – and surely we are looking also to be involved in more crowdfunding campaigns.