Seedrs Blog

Risky business: equity crowdfunding due diligence and performance

Risky business: equity crowdfunding due diligence and performance

16th August 2017 by Kirsty Grant

Many people ask me about the due diligence that platforms such as Seedrs perform, and I wanted to give you some answers. In follow-up to an interview I undertook on BBC Radio 4’s Today Programme recently I thought it would be timely to give a little bit more detail on our approach.

Seedrs works collaboratively with the FCA on best practices for the industry. We also want to ensure regulation is proportionate, appropriate and workable. We already take a best practice approach to due diligence and investor protections, that goes well beyond our legal and regulatory requirements. So we’re confident that if the FCA moves to further regulate the industry, we’ll already meet or exceed the requirements.

Appropriate regulation is important for the sustainability of the sector but must always be sensitive to the regulatory burden it imposes, balanced against the risks it’s seeking to mitigate. Perhaps it’s because we were the first regulated equity crowdfunding platform in the world that makes us so careful and considered.

Business failure doesn’t equal poor due diligence. A large proportion of early-stage businesses are likely to fail (this isn’t exclusive to equity crowdfunding), a reality that all our investors understand. No level of due diligence can prevent genuine business failure. Good due diligence starts with verifying that a business does what it says it does, has achieved what it says it has achieved and is in no way misleading investors.

Seedrs does this better than anyone else, reiterated by the fact that 90% of businesses that apply to raise with us don’t pass our initial verification processes.  We also put in place professional grade investment documentation to ensure that, if the business is successful, investors participate in that success as anticipated.

We’re opening up early-stage equity. It’s a high risk/high return area of investment and we’re giving access to those who’re interested in exposure to it.  Most of our investors wouldn’t be able to access this asset class so broadly without a platform like Seedrs.  Irrespective of the fact that a large proportion of our investors are sophisticated and high net worth (HNW), we’re very vocal to our wider audience about the need for investors to build a diversified portfolio that suits their overall investment risk appetite.

Investing in early-stage businesses isn’t about trying to pick one singular out-performer and putting all your capital towards one hopeful business. It’s about building a portfolio that gives you appropriate and diversified exposure to the asset class. We’ve created a platform that makes it economically feasible to make spread investments across a large number of private companies, enabling even “small ticket” investors to build a diversified portfolio across businesses.

Transparency and education are key. We do as much as we can to ensure that investors are fully aware of the potential risks (and rewards) of the asset class. Seedrs has a guide to our due diligence standards, so investors have full visibility on the steps we take in the name of investor protections. We also dedicate time and resources to explaining to investors the various rights, structures and jargon that are a feature of venture investment.

Last year we took the unprecedented step of publishing our first Portfolio Update. This tracks how the entire Seedrs portfolio of funded companies have performed over the years (dated 30 September 2016), using IPEV guidelines and a methodology validated by Ernst & Young. We also display real time internal rate of return (IRR) information to investors so they have visibility over the performance of their individual portfolios.

Don’t underestimate the potential. Critics love to focus on one-off company failures and present them as omens of doom for the industry. But there is a lot of good news that rarely makes headlines, and failures are hardly ever reported within the context of the performance of the wider portfolio. Take Seedrs company FreeAgent, which listed on AIM in December offering liquidity to crowd investors, and consider how Chapel Down is performing on ISDX. Thanks to our Portfolio Update we now have the data to back up our stance that building a diversified portfolio is the way to approach this asset class. The Seedrs Portfolio achieved an Internal Rate of Return (IRR) of 14.4% – jumping to 49.1% on a tax-adjusted basis, which we believe demonstrates that the model is working.

What should you take away from this post? That Seedrs is completely focused on transparency, education and a long-term approach. If you want to understand more about our practices, we’ve published an in-depth look at our due diligence standards, so investors have a full understanding of the steps we take (and what steps we don’t take on their behalf). All so they can make an educated investment decision.

This post has been approved as a financial promotion by Seedrs Limited, which is authorised and regulated by the Financial Conduct Authority. Investing in the types of businesses referred to in this report involves risks, including loss of capital, illiquidity, lack of dividends and dilution, and it should be done only as part of a diversified portfolio.

The performance figures set out in our Portfolio Update refer to the past, and past performance is not a reliable indicator of future results. Most of the performance figures reflect paper returns, which means that while they show the notional performance of investments based on market activity, they do not necessarily reflect the cash returns that could be achieved if the relevant investments were sold.

Kirsty Grant

Kirsty Grant

I'm the Investment Director for Seedrs. I manage the investment process from campaign review, through to deal execution and post-investment management.

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