Jim Duffy: Gambling on a start-up? You can get better odds at the bookies

Crowdfunding can be as much of a punt as backing a horse. Picture: Getty
Crowdfunding can be as much of a punt as backing a horse. Picture: Getty
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Crowdfunding creates new sources of funding but it is also a step into the world of ‘unknown unknowns’ says Jim Duffy

Okay, it’s your lucky day today. I’m giving a notional £500 to spend. Yes, 500 spondoolies, 500 smackers - 500 quatloos for all the Trekkies out there. But you must promise me: you will spend it or invest it today. You are not allowed to stick it in a bank or building society. You cannot stuff it under the mattress. And you most certainly cannot add it to your pension pot. No, you must use it or lose it folks.

So, here are some options. How about you lump it on the favourite in the 2.30pm at Plumpton? It’s currently tracking at 11/10, so there’s a decent wee bet there. You could also have a go with the dogs. The greyhound racing is a good night out at Shawfield in Glasgow. Perfect Princess is 5/2 favourite in the opening race I hear. If a trip to the bookies doesn’t float your boat, you could buy 200 Euromillions tickets for tonight’s draw. A multi-million pound jackpot awaits you. The problem with all these gambling options is there is no guaranteed return on your money. It’s just a bit of fun. A bit like equity-based crowdfunding.

There was a time when if you wanted to buy shares in a company, you would enlist the services of a stockbroker – or Smithers Jones in the world of The Jam. Smithers Jones, and many like him (now retired in their big houses in Ascot) would advise you of a few well-heeled stocks. The historical safe bets – tobacco, oil, minerals, banks and commercial property. He would then take your cheque and trouser his commission at the same time. Chances were, you would accrue a gain and make a small profit over the medium term. This process involved a fair bit of regulation. The companies you bought shares in had to report quarterly on performance and, nine times out of ten, be honest in their accounting methods. So, all in all, a fair bet. One would always be advised that past performance is not a guarantee of future returns. How convenient. Times have now changed. Now you can stick your £500 in a new venture – a start-up business – via online equity-based crowdfunding platforms. Bye bye Smithers Jones.

Equity-based crowdfunding is booming. And when an industry starts to boom, we should all get very nervous. Essentially, you can take that £500 today and browse a whole load of new start businesses that want your cash to “accelerate”. The crowdfunding platforms, and there are more and more sprouting up each year, host the new start companies. They put up a video pitch on the company or an explainer video. There is, of course, a downloadable three-year business plan with cashflows etc. You register and you comply with all the terms and conditions to allow you to invest your £500. You’ve got to be a Philadelphia lawyer to understand it all to be frank. Once you’ve signed your life away, you can invest in one of these shiny new companies. How exciting! But it’s just as exciting sticking your cash on the ponies at Plumpton. The similarities don’t end there. Once your bet is on with the bookies, you have no control over your cash and you are on a wing and a prayer as far as wins and returns are concerned. That’s why I have never invested any cash into an equity crowdfund. Yet.

As a champion of entrepreneurs, I believe that mechanisms like equity-based crowdfunding are needed and create great new sources of funding and investment. I like the fact that Smithers Jones is being disrupted. My concern is that once you part with the £500 I gave you, there is not enough regulation or governance currently in place to allow you to have your say on what happens with the cash. Think about it. If you and the rest of the crowd invest £150,000 for a 10 per cent equity share, this essentially means you are a tiny wee shareholder, whether you are grouped together or as individuals. And start-ups being start-ups, they have two things in mind: bringing in the next big round of investment and staying alive long enough to do this. Add to this the absolute fact that the average start-up CEO does not know what he does not know, and your £500 is looking even more attractive on the National Lottery tonight.

As I look at the next chapter in my life, I am focusing my lens on the new start businesses who have raised seed investment, whether it be via angel investors, equity-based crowdfunding or high net worth individuals. What I am seeing across the UK as a whole is fairly balanced: early stage entrepreneurs are having Donald Rumsfeld moments. You will recall his TV interview when he said: “There are known knowns. These are things that we know. There are known unknowns. That is to say, there are things that we know that we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.” At the time, I thought he was off his rocker, but now that I am studying post-seed investment companies, I know exactly what he was talking about.

Now let’s get back to your £500. As you can see, you have options galore. I’m not trying to put you off equity-based crowdfunding today as you consider your options. What I am concerned about if you do decide to take a punt on a start-up is: who is enabling them, guiding them and being that Donald Rumsfeld on their team? Currently as it stands, in my humble opinion, you have better odds at the bookies than you do with equity-based crowdfunding. Not because our entrepreneurs are daft, reckless or don’t care. No, it’s because they require even more acute care and attention once they have our money, as now they have to execute in a world of unknown unknowns.

Enjoy your punt on whatever you choose.