Of course someone has to blaze the trail and as with many paradigm breakers, being the first mover is not necessarily an advantage. Since 2011 the evolution of two distinct models has helped shape the future – entrepreneur and investor led ECf platforms. The former provides a space for businesses to raise money, with little regard to the outcome for the investors; caveat emptor, raw in both tooth and claw. Or as the CEO of one of the now failed ECf funded businesses put it - ''It was surprisingly easy and we went down the line of least resistance''. The alternative, investor led ECf, places more emphasis on the investors, often combining VCs or Angels as leads in the pitch. It's a more professional approach.
This symbiotic use of professional investors and professional advisers is the way forward.
Whilst this linkage is no guarantee of success, it helps solve one of the most pressing problems faced by ECf – a lack of credibility as an investment vehicle. Investors expect a high failure rate but like to think they can beat the odds, given an acceptable level of accurate information and a professional due diligence service. Both of these have been hard to find. This must change.
Just before this last Christmas, we saw developments that presaged the arrival of more professional platforms – ones run by private equity experts and tailored to a more targeted audience. The sale of Camden Brewery and Easyproperty's £25m raise with the expected IPO to follow, both show the way forward. More substantial businesses already on the verge of going public or selling, will take to ECf to test their market. Investors will accept much smaller returns on these for lower risk and will select them as a backstop in their ECf portfolios. Given a choice, it seems obvious these companies will pitch with professionally run platforms.
As investors become more sophisticated, so platforms will have to respond. New platforms where investors can rely on the information provided and be sure about the quality of the due diligence being carried out, are already emerging. The Dragons Den analogies will be a thing of the past and the £10 punter will be have to find another form of entertainment. Companies issuing projections which prove to be 1000% out, will no longer get to pitch. Platforms that have encouraged and profited from these will cease to exist. Investors will require a more sophisticated analysis of the all-important exit; not merely a hopeful statement based on misused calculations.
The new measure of success will be how these funded companies perform, not whether they managed to raise the funding. Platforms will be more tightly bound up with this success and will become an integral part of it. In turn investors, via the platforms, will be better informed about their chosen companies. The information asymmetry they currently face will dissipate.
The big question now is can ECf change before the dead weight of the hundreds of funded companies that will fail over the next 24 months, brings it all crashing down?
For the answer to be yes, these are some developments required in 2016 and beyond -
These developments are in line with the US's SEC and Australia's ASSOB, who have both been far more cautious than the UK. Whilst no one wants to see endless red tape and spiralling costs preventing the expansion of ECf, there is mounting evidence that the current dominant retail model is not working.
2016 could prove a pivotal year.