Ever wanted to begin crowdfund investing, but didn’t know how to find the heroes amongst the zeroes? Maybe you should spend an hour in the company of Shane Smith, the driver behind Intelligent Crowd TV. Not only does he have an expert’s knowledge of how equity crowdfunding really works, his latest venture is making it easier for the rest of us to make better informed decisions about which projects are truly deserving of our cash.
Research shows that whilst there are 80,000 people in the UK with sufficient taxable income to take full advantage of the upper limit set by HMRC (£100,000) for investing in Seed Enterprise Incentive Companies (“SEIS”, likened to an ISA on steroids!) the vast majority will not do so for a number of reasons. The same goes for the rest of us, who might want to invest more modest amounts.
Firstly, you are unlikely to hear about these kinds of investment opportunities from your Independent Financial Advisor (IFA), solicitor or accountant because, since the shares of qualifying companies are unlisted, any advice given by these professionals won’t be covered by their professional indemnity insurance. The Financial Conduct Authority (FCA) will label qualifying companies as high risk, taking no account of the significant risk mitigation that HMRC’s tax framework offers.
So that leads us to the second problem: to find the good investment propositions, you’re on your own. There’s no research to rely upon in the start-up or early stage company space. And therein lies the nub of the problem: investors with the biggest SEIS potential tend to be the ones with the biggest jobs – cash rich maybe, but time poor and simply unable to do the necessary research and diligence “legwork”
One way to get around the problem of finding the “heroes”, maybe, is to do what everyone else is doing. After all, if other investors have already committed 50- 60% of the funds that a company is looking for, then it must be a viable proposition, right? Wrong. There is risk inherent in the herd mentality, whereby one investor’s decision to plough their savings into a badly thought-through campaign encourages others to do the same (well, if they are investing, maybe they know something I don’t), and a lack of independent and objective analysis (of course the founders think their idea is a world beater). Worth remembering that almost all successful campaigns start off with commitment from friends and family – whose motivation is to support a loved one, rather than to objectively evaluate an investment proposition.
But there’s risk inherent in not following the crowd, too: the risk is that you’re simply wasting your precious time when you find an investment gem and back it, because too few other investors are doing the work to reach the same conclusion. According to Shane, we mostly hear about the success stories on crowdfunding platforms, not the campaigns that fail to reach their targets, and the reality is that around 80% of campaigns fail to close successfully. If your money is repeatedly on the 80%, building your diversified portfolio will be a challenge.
Another investment decision shortcut is to only invest in what you understand, but this means that the overwhelming majority of successful campaigns are for B2C propositions. Everybody wants to back a new flavour of ice cream or a social networking platform for pets, but nobody wants to get on board with a cloud storage platform or research and analytics dashboard, which is where most of the professional/institutional investor money ends up going, because it just doesn’t sound sexy enough.
But before we throw the baby out with the bath water, as it were, what if there was a way to solve all of these problems; objective analysis, a selection of genuinely investable propositions, no following the crowd, in one simple and original new format that demands only a small time commitment? A TV show perhaps? Bear with me.
Shane Smith spent the bulk of his career in FX & equity research, founding an FSA and SEC regulated independent research company which identified and recommended listed companies and new IPO’s that investors would do well to pick up shares in, as well as designing a research platform for the London Stock Exchange. His company eventually floated on AIM.
The firm’s institutional clients also wanted to meet the managements of the listed companies featured in the research reports. Shane studied the prevailing business practices and realised that the “investor roadshow” model was still trapped in the dark ages of planes, trains and automobiles – and set about finding a 21st century solution; he came up with the “Studiobot”, a remotely controlled broadcast studio that could sit in the corner of a company’s boardroom and deliver television quality broadcasts from the company directors, to global viewers, for a fraction of conventional broadcast costs. The Studiobot was designed to reduce unnecessary travel and create live, interactive broadcasts that allowed for face to face conversation between management and investors.
Lunch with an old pal in 2013, a hedge fund manager who was exploring ways to set up a talk show, saw the Studiobot jump from a niche to a mainstream application: the pair came up with “Tip TV”, a 2 hour daily talk show split into 1 hour of finance discussion, and one hour of sports chat. And a new broadcast technology provider, Easy TV Ltd, was born.
Anyway, to return to the story and the problem of how to match the best crowdfunding campaigns with genuine investors. The idea and concept actually came as a result of an unsuccessful crowdfunding campaign to fund the development of the new broadcast technology company, Easy TV. That was the moment that Shane realised that more complex, sophisticated investment propositions require a richer pitching platform, to match. Imagine the scenario if you will; Thursday 9pm, same time every week so those investors with demanding jobs (or families!) have plenty of advance notice. A presenter, 4 pitchers, all carefully curated to ensure their ideas are plausible and investable, an objective analysis from the relevant sector analyst at Argus Research, New York’s longest established independent research firm, and an audience of informed, engaged, professionals with the ability to interact with the show. Now here is where it gets interesting.
As each pitch is concluding, the audience have the opportunity to register their interest, indicating how much they might be prepared to invest. Because nobody can see how other investors are behaving at this stage, the herd mentality is cleverly eliminated. You must back or not back on the strength of your own, now well informed, judgement. If and only if, the number of backers and amount pledged is sufficient, the idea, project or product is launched the following day on the crowdfunding platform.
Of course you are not obliged to part with your cash just yet, there’s nothing legally binding about expressing a willingness to invest a certain amount, but it does ensure that only the campaigns that have shown themselves to be genuinely investable will be officially launched as crowd funding campaigns. This helps both the founder and angel investor; one finds out very rapidly if the deal is going to close (48 hours, rather than 60 days) and the other gets to see 4 high quality pitches from the comfort of their TV den or desk, and avoids having to spend hours trawling through glossy marketing campaigns without the benefit of impartial, objective advice.
This could well be a thing. You can never guarantee a successful close to a crowdfunding campaign but this kind of exercise is as close as anybody has got to a product market fit. The last thing on the minds of most people across the UK with investable assets is travelling to central London on a cold January evening in the snow to attend a “founder dating” event, with no guarantees about the quality of the companies pitching. But popping to the study on a Thursday night and skyping into a polished TV show with experienced presenters and high production values doesn’t present such a problem.
The government has created some of the best tax breaks for early stage investing that you will find anywhere in the world, so advantageous that, even if the company you back loses everything, your losses are capped at around 30% of what you invested, an amount that you would have lost to the taxman anyway. It’s an irony that the people who the scheme is aimed at don’t have the time to investigate the opportunities more fully, and often aren’t hearing about them at all. Perhaps Shane Smith and his team at Intelligent Crowd have found a solution that suits all parties. Like many of the best ideas, we’ll all be asking why we didn’t think of it ourselves!
Shane Smith has spent his career in equity research, connecting institutional investors with listed companies, and now connecting start-up/early stage companies with prospective crowd investors. His technology, investor communications and Intelligent Crowdfunding companies, are based at St Paul’s, with offices in the USA and Asia. Shane is always on the lookout for great companies who are thinking of starting a crowdfunding campaign, and are EIS or SEIS eligible. The first show will air later in the spring. You can reach him on firstname.lastname@example.org or visit the website, http://intelligentcrowd.tv/ to audition or to sign up as a registered viewer.