Crowdfunding websites must make the risks clearer about investing in startups if they want to attract serious investors, claims a new report.
Global startups raised £1.16 billion through 453 crowdfunding sites in 2011, says the report from independent charity Nesta, who were asked to study crowdfunding by the UK government.
The number of crowdfunding sites increased by 60 last year, topping growth of 38% in 2008.
In Europe, five crowdfunding portals were online at the end of 2011, which raised £7.9 million.
The study concludes crowdfunding may have advantages for start-ups, but tends to attract less experienced investors who are unaware of the risks involved in equity investment in startups.
Nesta recommends startups should disclose more information about the risks involved in their businesses, rather than leaving due diligence to investors.
“Nesta data shows that only 40% of businesses are still alive after their first 10 years and less than 10% of these achieve significant growth in employment,” said the report.
“Platforms need to ensure that investors are adequately informed of the risks involved in investing in businesses for equity. One experienced venture capital investor noted that over-optimism on the part of amateur investors could be one of the greatest barriers to ensuring the success of equity crowdfunding.”
A separate study, The Venture Crowd Report looks closely at the crowdfunding sector and offers insights for potential investors.
“Crowdfunding is big business. The idea of financing projects or businesses with small contributions from large numbers of people is catching on in a big way and now accounts for significant amounts of money,” said Nesta.
“Not only does the model provide finance but also access to a large number of people who can test and market an idea. Crowdfunding takes a number of different forms, the most successful of which has been the reward-based model where participants receive non-financial rewards in exchange for donating to a project.”