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CrowdRating report shows the crowd’s investment decisions are largely driven by non-financial criteria

A report by CrowdRating, the independent ratings agency for equity crowdfunding, suggests that crowd investors are more likely to base their investment decisions on information about the management team and product in an equity crowdfunding campaign, rather than on information about the company’s financials. The report, published today, looks at what information the crowd considers most important overall when evaluating investments, and discusses possible reasons for the crowd’s behaviour as highlighted by the research.

The report, ‘Observations on 2015 Crowdfunding Campaigns’, is based on data from 155 equity crowdfunding campaigns on which CrowdRating prepared ratings in the nine months from April to December 2015. CrowdRating provides independent ratings on equity crowdfunding campaigns. Using CrowdRating’s checklist-driven Ratings Engine, each campaign is systematically scored against three core criteria – Management, Product and Investment – with each category receiving a Gold, Silver or Bronze rating.

From its analysis of the data set, CrowdRating observed that crowd investors will usually recognise if a campaign has a really strong management team and, in particular, can spot a weak product offering; more often than not making an investment decision on the back of that information. However, when considering the investment case, they appear to be largely indifferent to information on key financial areas, such as the valuation and projected financial performance, which appear to have little influence on the crowd’s investment decisions.

Modwenna Rees-Mogg, one of the report’s authors and a founder of CrowdRating, commented: “It was not entirely surprising to discover that the crowd focuses on the quality of management teams and products when assessing investment opportunities, not least because many campaigns and platforms put greater emphasis on this information. What is more revealing is the crowd’s apparent indifference to the financials. We believe there needs to be a broader industry debate about the positioning, quality, and analysis of financial information within a campaign and more discussion around if, and how, investors should be encouraged to pay more attention to financials as part of their overall investment decision making.”

The main findings from CrowdRating’s analysis of the data set are:

  • The crowd is strongly influenced by information on management teams and product
  • The crowd is able to recognise good management and spot when product offering is weak
  • Campaigns with gold ratings for management and product are more likely to win support from the crowd
  • 41% of campaigns with a gold rating for management succeeded, whereas only 7% of those with a bronze rating for management successfully raised funds
  • 35% of campaigns with a bronze rating for product were unsuccessful in their fund raising. Only 18% of those with a bronze rating for product successfully raised funds
  • Crowd is largely indifferent to key financial criteria such as valuation and business performance projections
  • Valuation has little impact on a company’s ability to raise funds. If anything the data shows that the higher the valuation the more likely a campaign is to succeed
  • More than 70% of companies with a valuation over £5 million were successful, compared to 49% of those with valuations under £5 million
  • Even seed stage deals (46% of the total data set), where lower valuations are typically seen as more attractive, companies with higher valuations were funded successfully
  • A company projecting as much as 2x or 3x year on year profit growth appears just as likely to gain investment as one with more conservative projections

Julia Groves, founding chair of the UK Crowdfunding Association, commented: “This is an interesting first report from CrowdRating, showing that in 2 out of 3 categories the crowd is consistent with their Ratings Engine. It is also good to see that scores have been getting higher since its launch, as all platforms increase their due diligence, screen out lower potential businesses, and increase the amount of quality information available. As an industry we work hard to educate investors and are always interested in independent sources of insight to build the wisdom of the crowd.”

The 155 campaigns in the data set were listed across four major UK crowdfunding platforms – Crowdcube, InvestDen, Seedrs and Syndicate Room – and include both successful and failed campaigns. They range from start-ups to more established businesses, and are located predominantly in the UK, operating in a broad range of sectors.

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