I’m a big proponent of crowdfunding. I like the idea that small investors get together, get involved in an idea, and work together to invest in markets and products that they might not otherwise have. Also, I like the altruistic thought with which some investments are made to realize an idea that may not seem commercially auspicious.
However, the way crowdfunding is currently being operated across Europe – after six, seven years after launch – I do not like. Unfortunately, what bothers me, I can not summarize in one sentence. There are many small points that make the crowdfunding market less attractive than it could be in its entirety, making it even less appealing to me at the moment:
1 The dealflow is too confusing
According to crowdfunding.de there are currently 55 platforms in Germany (some more, some less active and not all with start-ups as focus). To get information about new investments, you have to maintain your own user profile on each of these platforms. In order to stay informed about new investment opportunities, I have to regularly visit the platforms or subscribe to their newsletter.
This point of criticism is partially alleviated by aggregators such as Crowdexplorer or Crowdcircus . However, their appearances contain only to a limited extent important information that is relevant for the investment decision. So far, aggregators are only helping to be informed about what’s on the shelf, but not what’s in the packaging.
2 The analysis of offers (across different platforms) is only possible to a limited extent
Since the investment contracts of the individual platforms sometimes contain very different risk and return components, a separate model must be developed for each platform for the analysis of the investments in order to be able to assess the fundings of a platform and compare them with one another.
This is not facilitated by the fact that platform numbers are regularly offered by the platform in a tabular but not exportable form (eg as Excel). Numbers must therefore be typed. Not to mention the ability of the platform to provide tools for financial analysis (which may not be the right place to do so, see Conflict of Interest).
A comparability of the offers of different platforms with each other, but would not be possible. There are possibilities to compare different offers; but most always have at least one catch – usually that the comparison is not risk-adjusted or that you have to work with too many assumptions.
3 Information deficit
The small investor has an obvious information deficit towards the company that wants to be funded. This is stupid at first, but not decisive for the war. My criticism is that, in my opinion and knowledge, not enough is being attempted to minimize this information deficit.
The investment alternative stock exchange is there a good counterexample. I am aware that it is not the effort to produce this kind of information transparency from start-ups, but I would also like to point out that I can learn more about the economic nature of a listed company as a non-investor, rather than an investor in a crowdfunded company.
Again: Exchange transparency should not be the goal! Nevertheless, there are enough levers for platforms and found companies to increase transparency. That would start with the fact that platforms have some due diligence. to their investors and communicate the nature of their due diligence. In part, exam performance is certainly already provided today. After all, it is also about the platforms to avert damage from their own company.
On the other hand, for the financed companies, the criticism does not concern the period before the investment. At this point in time, companies are often still very knowledgeable (or they simply choose to be against an investment as an investor). Rather, it bothers me that some companies lose their information after investment, sometimes even to an extent that does not meet the contractual obligations of companies …
Contractually, an investor often has no further resources than to cancel extraordinarily. Automatic sanction mechanisms can remedy this, but are not provided for in the contracts.
4 The return is just too lean
Who follows my performance updates, that I have so far (mathematically unclean) on a total return of about 110%. Since I’m already much better than many others who may have a ‘negative return’ show. For me, the total return is essentially due to a single, very successful investment. Had I not had that, I would stand at about 6% overall performance. That really is a difference…
Annualized, I come to a low double-digit rate of return. If I compare what you would have earned with standard stock over the same period, I have to say that while this is almost acceptable acceptable, I would have preferred the time I spent on crowd investing to work on the quarry pond. For the effort, the duration, the liquidity and of course the risk I feel as an investor simply not adequately remunerated (which is also strongly related to point 7).
If you scold on an investment form, then taxes can not be far. My problem is not the tax numbers themselves (so much tax is not synonymous, see return). My criticism is that I have to calculate the taxes per platform myself. While some have an income statement they provide, the standard is not. In addition, the tax treatment of income is not always clear / was / communicated.
Platforms could help by aggregating taxes per investor, but they rarely do. The information provided by the start-ups may also be better for distributions and, in particular, repayments.
6 Conflicts of interest remain unresolved
The main interest of companies is profit and thus revenue generation. Platforms earn primarily on the commission that funded companies pay to them depending on the funding amount. The main interest of platforms lies in completed successful funding. The performance of investors is more of a downstream interest. This conflict of interest can be alleviated by synchronizing interests, for example via a carry agreement.
An absolute solution of the conflict of interest is also not possible, but I would have liked more relief, eg more transparency and the creation of equal interests. For example. The platform could stretch its transaction fee more over time and make it dependent on the company’s milestones.
In addition, the only advocates of investors are in doubt the consumer protection authorities. Thus, there is no instance that represents the interests of retail investors (meaningful).
7 Administration of existing investments too expensive
In addition to points 1 and 2, this point is the most important thing for me: the administration of the investments, if you want to do it right, takes just too long. This problem was also a bit the basis for this blog. I wanted to force myself to deal with the topic more so that I would spend time looking after my portfolio. Unfortunately, I did not succeed that much. Monitoring, portfolio management and performance measurement are too time-consuming, even with Excel, to make it worthwhile.
Of the above points, many refer to the market as such and are expected in a young market. The only question is whether we have not arrived at a point where we could expect more. Platform-related criticisms affect most platforms; some more, some less. Should individual platforms prevail in the market, some problems due to the size should resolve itself. The individual platforms have to get bigger.
At the same time, an entity must be established to make it easier for investors to monitor deal flow, analyze individual deals, and monitor, control, and measure their portfolios. Maybe some of the aggregators will grow into this role. Perhaps crowdfunding.de will take on one or the other role as a market player. The potential would be there.
However, as long as the above-mentioned criticisms are valid, I will invest – if at all – only very selectively. Unfortunately, this blog will unfortunately come to an end here. It was a lot of fun. I met some nice people and had great conversations. The exchange with the community by mail was more profitable than I had expected in advance. I will miss that.
If you know someone who is busy solving some of the problems listed above and want to make contact, I’m happy to help!
Until then, I wish you continued good returns and have fun investing!