Fewer than one on ten (8%) of businesses seeking crowdfunding are in profit, new research has found.
In a study of 115 businesses currently seeking investment on six UK crowdfunding platforms, just nine have made a profit, according to publicly available company accounts analysed by Growthdeck.
With more than a third of the companies yet to file accounts with Companies House, the findings highlight the challenges faced by investors in assessing the strength of such opportunities.
Growthdeck, which is launching its own equity crowdfunding platform this month, aims to counter this issue by taking a “private equity-style approach” to investment evaluation and due diligence, with a particular focus on long-term business viability in growth sectors.
Gary Robins, who founded the new platform, was previously an investment director at 3i and has further private equity experience through Radius Equity, Rockpool Investments, which he set up with Nicola Horlick, and investor network Hotbed.
“Crowdfunding can be a great way for individuals to dip their toes into growth company investing, but this shows they need to choose carefully,” he said. “Clearly crowdfunding platforms need to be putting forward more robust and profitable businesses.
“While crowdfunding is opening up many exciting investment opportunities for more people, a real question mark remains over the underlying value of many businesses that retail investors are backing.
Although investors may be attracted to invest in businesses where they see significant potential despite a lack of track record, Robins continued, too much exposure to early stage businesses could be a risky strategy.
“Whilst many of the most successful tech companies were unprofitable at the point of receiving early-stage funding, our finding that such a large proportion of potential investee companies in a wide range of sectors across the board are unprofitable or have no trading history is a concern.”