SEEDRS published a detailed report of its entire equity crowdfunding history on September 7, one day before the deadline closed for submissions to the FCA for its ‘post implementation review of the crowdfunding rules’. Coincidence or not, hats off to the company for producing the first set of meaningful statistics for a sector that has never made any secret of its high risk/high reward proposition.
The report reveals that 47, or 18.6%, of 253 companies for which it raised money went bust. A failure rate of almost a fifth is undoubtedly a high proportion, but it doesn’t quite look so alarming if you consider the flip side – that over 80%, or four fifths, of these young companies and start-ups are still going. You might even argue that it’s quite impressive.
The stats also show that the average investment return (net of fees) has been 14.4% per annum, albeit that this is a notional or paper profit because none of the shares has actually been sold yet at these estimated valuations. But it becomes mind-boggling when, as the report shows, the 14.4% return soars to 43.3% once the appropriate tax reliefs (e.g. EIS) have been applied. Small wonder that traditionally conservative investors, offered next to nothing by the banks for their deposits, have been casting aside their inhibitions. And that’s just the averages. If you had invested in some of the best sectors – for example, food and beverages – the notional return could have been nearer 23%, or almost 50% after tax reliefs.
As SEEDRS points out, theirs is an unfolding story, but all they can reasonably be expected to do is to tell the world what has happened so far, warts and all. Maybe some people should not be tempted into this type of speculation, but surely it is better that, with suitable caveats and clear warnings, they be given access to an asset class that historically been the preserve of the venture capitalists, institutions and HNW investors.
The trick, if there is one, is to create a diversified portfolio, just as the professionals do, with the aim that the returns generated by a few good ones will outweigh the losses from the failures. You win some, you lose some. Do we really need ‘nanny state’ legislation to spell out what sophisticated and high net worth investors already know?