4 Fundamental Flaws of Equity Crowdfunding Platforms

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My father used to say: “If you do something, make sure you are doing it right”. That may not be the coolest quotation of my dad, but he genuinely believed in this idea. I, on the other hand, am a firm believer of “finished — not perfect” idea.

 

When I examine existing equity crowdfunding platforms it seems that their creators were residents of “finished — not perfect” town too. The problem with this idea is that it pushes people to make the move.

 

You don’t need a second thought”, — it says, “Launch it, test it, and fix it later”. And they launch their platforms!

 

I guess that happens every time when a company is developing an equity crowdfunding platform because it seems to be the only explanation why all of them have the same 4 flaws.

 

1. ALMOST NO LIQUIDITY. Out of 11,609 equity crowdfunding campaigns held in TOP9 platforms in Europe until the end of 2018, only 9 companies made an exit. Some might argue that the concept of equity crowdfunding is relatively new and it needs more time. Maybe, but startups invested by VCs are a bit more successful. As the popular statistics goes: out of 10 startups 9 will fail (will not exit), so 10 % will become a successful company.

 

The problem here is quite basic. The platforms provide startups with funding and that is about it. VC Funds, on the other hand, provide not only funding, but contacts, knowledge, and motivate founders to go for better results. This “soft” part of their investment makes the 129x difference.

 

Can the platforms push their startups more? Yes. Should they? I think no. Platforms are tools. They should focus on doing what they do best and mentoring founders would be something totally new for them. And “new” means a period of trial and error.

 

2. APPLICATION PROCESSING SPEED. Only 1% of startups end up launching their campaigns on Seedrs.com (said by a representative at the conference in Vilnius). Not that 99 % of companies do a bad job at pitching their products and ideas or presenting required documents. The reason is simple: the platform receives 100 times more applications than it can handle.

 

I don’t have the answer to this phenomenon, to be honest. Maybe its the market standard to keep the business sustainable, but I doubt its the case — Seedrs reported 2018 as the record year.

 

It could be for a reason that when the project is launched on your platform, you are kind of responsible for it. So, naturally, you narrow down projects to launch only the ones that are the least likely to cause you a case of bad publicity in the future. Then there is a fact that the due diligence process is really hard and time-consuming and platforms can’t afford to check all of them. Maintaining the balance of investors and campaigns? So, why not onboarding more people who could invest. They already have a surplus of projects, so more investors — more business, right?

 

3. LIMITED GEOGRAPHY AND SCALING. This point correlates with the second one a little bit. Platforms mostly check the startups only from jurisdiction they are familiar with because doing the due diligence of the startup from across the world would take even more time and resources. That is why platforms mostly limit themselves with startups from the same country as they are.

 

If you would check who invest in certain projects you would notice that retail investors also don’t like to invest in startups from countries they are not well familiar. Startup from Germany will receive more attention and investments from German users of the platform.

 

So, platforms are in a bit of a crossroads: to get more retail investors, they have to expand in other markets, but their expansion can not be easy as they have to do a lot of checks in a jurisdiction they are not familiar with. So, it would be logical to open an office in a country you would like to expand to, right? Right, but it also would be very expensive and you would still have the problem mentioned as #2.

 

4. AFTER THE INVESTMENT IS MADE, INVESTORS ARE ALMOST FORGOTTEN. Somebody had to say it but it is true. Equity crowdfunding platforms seem to be interested in the success of startups as long as they will have another funding round on their platform. What concerns the retail investors the situation is even worse.

 

Yes, investors receive some-time-period but that is about it. One could say that they are imprisoned as they have little-to-none liquidation possibilities and no tools to track the performance of the startup between one report and the other.

 

Retail investors from the UK at least have EIS and SEIS incentives but what about the others? Well, they have to believe that in a couple of years their startup would exit or merged/acquired and their stock will be sold for a higher price than they paid.
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Yes, I agree that probably not all equity crowdfunding platforms have all of these problems. But most of them have at least one of them and for me — that sounds too much. Any of these flaws is critical but how they can be fixed? Well, you have to change the concept of how these platforms operate — easy. That may sound comic, but I am not joking — the team of Businero already has solutions for all of these problems. Just like my father used to say: “If you do something, make sure you are doing it right”. And we do!

 

Taken from https://medium.com/businero-com/4-fundamental-flaws-of-equity-crowdfunding-platforms-92cb2a2d145

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