Is the crowdfunding boom over? 2016 is set to be a slower than 2015

Britain's nascent crowdfunding industry is at risk of "a shake out of the smaller players" in 2017 as momentum slows, according to a new industry report.

Industry data provider AltFi and law firm Nabarro's "Where are they now? 2016" report, released on Tuesday, predicts that 2016 will see the crowdfunding sector raise less than it did in the prior year for the first time since crowdfunding emerged in 2011.

Crowdfunding is where ordinary people - so-called retail investors - put money into startups, investing as little as £10 or £20 at a time in return for equity in the business. Multiple platforms have sprung up across Britain, the biggest of which is Crowdcube. The platform has raised over £195 million for over 460 companies.

The AltFi report, which looks at six of Britain's biggest platforms, predicts that companies will crowdfund close to £130 million this year but that is below the total of more than £155 million raised in 2015.

The report says: "It is inevitable that Brexit will have played a part... But within the detail there also seem to be indications that there is a wider trend at play."

The report says there has been a "recent slowdown in momentum" and a shift towards larger platforms dominating the sector. Only Venture Founders, Seedrs, and Crowdcube managed to successfully fund companies in the third quarter of the year. All the smaller platforms went three months without a deal. Most depend on cuts of successful deals on their platform for their revenue, meaning a slowdown in business can be fatal.

While it is too early to say whether this is just a temporary Brexit-driven slowdown, AltFi says that "without a rebound, the industry may need to re-adjust for a lower rate of growth, and that could mean a shake out of the smaller players."

AltFi's data shows momentum has slowed not just with the number of funding campaigns but also the size of them. Average funding rounds on the platforms jumped from £292,000 in 2014 to £419,000 in 2015 but rose to just £447,000 in 2016.

'The survival rate is impressively high'

The report also highlighted the current uncertainty of crowdfunding as an investment category. There have been just five exits - where investors realise a return from their investment - out of 955 crowdfunding campaigns since 2011.

28.7% of companies have had an "up round," meaning they have raised money at a higher valuation than in the crowdfunding campaign. This means investors are sitting on a theoretical, "paper" profit.

11.7% of companies that raised money through crowdfunding have gone bust and 4.3% have had a "down round," which leaves crowdfunding investors with a "paper" loss. 10.5% of companies are identified as at risk, with AltFi unable to contact them by phone, email or social media.

But AltFi could draw no conclusion on the investment performance of the vast majority of companies that have raised money through crowdfunding - 70.9% were identified as still trading but will little insight beyond this.

Still, AltFi concludes that these are "encouraging figures here which show that an increasing proportion of crowdfunded ventures are in good health."

The report points to a 2014 study by insurer RSA that found 55% of small businesses fail in their first year. 73.60% of companies that raised money from 2011-2013 are still trading, an encouraging sign, but a relatively low bar for success.

AltFi says: "Whilst there have been concerns that valuations can seem generous, and that disclosures may not meet the standards required by professional investors in early stage companies, thus far the survival rate is impressively high."

Luke Lang, the cofounder of Crowdcube, says in an emailed statement: "Crowdcube has already delivered financial returns to investors; with three of the five exits highlighted in the report coming from businesses, like Camden Town Brewery, to raise on Crowdcube.

"In the form of exits, follow on rounds on funding and businesses showing no signs of distress, we're seeing success for nine out of ten companies to fund on Crowdcube, bucking the high failure rates often reported among early-stage businesses."

The crowdfunding industry has faced scrutiny from the press and investors in 2016, with increased coverage of failed investments such a food delivery firm Pronto and claims management company Rebus. Bloomberg wrote a withering feature on the sector this week with the headline "You Too Can Invest In a Startup Likely to Go Bust."

Concerns have been raised about regulation of the sector. Andrew Tyrie, the chair of the influential Treasury Select Committee in parliament, wrote to Britain's financial watchdogs earlier this year raising concerns about regulation of the sector and CEO of City of London stockbroker finnCap told Business Insider earlier this year that the sector has "a long way to go."

£368 million has been raised by 751 businesses since 2011, according to AltFi.

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