Category Archives: governance
I don’t think I’ve blogged about it before, but over some years now I’ve made a few crowdfunding investments in (near-)startup companies. I regard them as a bit of a flutter: some people bet on the horses, I bet on companies. With the added bonus that when a bet comes good and the company prospers, I’ve supported a company’s growth, benefiting more than just its investors. And for (most) UK investments, there’s the added bonus of EIS tax relief.
In recent weeks, two of my investments (coincidentally both originating from the same time, March/April 2015) have reached sharply contrasting outcomes. A winner and a loser, the one bought out by a big company, the other went bust. Actually neither outcome is quite that simple, and maybe they offer useful lessons in the fledgeling business of crowdfunding. Both have – in different ways and for different reasons – left at least some investors deeply dissatisfied with the experience.
In the interests of brevity I’ll separate out the stories of the two companies into another post. But from these and others, I think it may be time to learn some lessons about crowdfunding. It’s an emerging phenomenon: each platform works differently, and there is no universal governance model. A generation ago the then-new VCT industry – arguably a good precedent – produced some big winners but a greater number of big losers for investors; since then it’s stabilised and consolidated and for a while became quite a gravy-train. Now it’s the turn of the new kid on the block seeking a successful model.
When a VCT invests, they typically appoint a Non-Executive Director to the board of an investee. Ideally he/she not only represents the VCT’s interests as investor, but brings a depth of experience to the board that complements the business founders’ expertise in their own field. Crowdfunding comes without such representation, so an inexperienced entrepreneur may be left without that guiding hand. One mainstream crowdfunding platform, SyndicateRoom, always has a Lead Investor with skin in the game – typically (I think) an experienced business angel investing much larger sums than my little flutters. Elsewhere many individual companies have their own lead investors/advisors filling a comparable role. But that’s ad-hoc, and in any case they don’t represent anyone but themselves.
Now here’s the interesting thought. It’s not (in general) realistic for the Crowd to appoint a NED to represent us, but perhaps we can do better than that?
The platforms provide a forum for discussion of each investee and communication between investors and management. At best, companies engage actively with investors, and some investors bring valuable expertise and ideas. Better still, the best investor engagement is not lost in noise: in most cases noise is low, and the best ideas are readily appreciated. Sometimes an investor also asks searching questions: if an investee’s reporting leaves unanswered questions, there will be an investor whose own job description is financial controller of a small company who has exactly the expertise to ask the right questions.
At worst, companies don’t engage at all, nor even report to us. As of now there seems to be nothing we can do about it when that happens (or should I say doesn’t happen)?
So to my thoughts about governance in crowdfunding investments. We have no NED, but we have an engaged and interested crowd, with a range of expertise. What we should be thinking about is formalising the interaction between crowd and investee, building on what works well and spreading Good Practice more widely.
One approach to that would be to mandate scheduled shareholder meetings as a contractual requirement for raising funds on a platform. These would be held online and could be chaired by a representative of the platform, and held either at regular intervals (e.g. every six months) or alternatively appended to a company’s board meetings. They should be sufficiently formal to have an Agenda, to accept Resolutions and (non-binding but indicative) Votes, and be empowered to request (though not force) Actions on a management. Being online, every meeting will be archived and referenced, just as campaigns and discussion are.
That is, of course, in addition to the informal engagement through ad-hoc discussion boards, which work well and serve a useful purpose if (and only if) a company’s management engages constructively with investors there.