Rising above the crowd – how CrowdBnk stands out in the crowdfunding market
The interest in online crowdfunding platforms has exploded over the past years. CrowdBnk is one of the platforms looking to gain a foothold in this highly competitive market. London Entrepreneurship Review had the opportunity to meet with Ayan Mitra, CEO and founder of CrowdBnk, to discuss the merits and challenges facing his company and the crowdfunding market in general.
In a sentence, what is CrowdBnk?
It is a regulated digital investment platform that allows you to invest in early-stage and established companies at the right time.
What is your background, and what inspired you to set up CrowdBnk?
I grew up writing software for the early internet banking platforms such as HSBC and First Direct. That was followed by work for Marks and Spencer integrating Electronic Point of Sale (EPOS) systems, then broadband roll-outs for Freeserve and Orange. Throughout my first 17 years of work I was also exposed to start-ups, and realised that sub-£5 million capital raisings were really inefficient. The market was geared towards bigger transactions with lower risk. Most people who make money out of these things are early investors, and there was no access for ordinary people to gain exposure to those types of companies – not in Europe, at least.
The idea for CrowdBnk came about in New York in 2009. Kickstarter had just been launched, and I participated in some of its deals. In parallel, I was helping a start-up raise capital using traditional means. That was extremely hard, and the company almost went out of business. I did my research and discovered that every year 25,000 companies fail to find finance at their terms. There was no platform available to make it easier for these businesses. That’s where the idea for CrowdBnk was born.
Businesses have been able to raise finance through equity and debt since time immemorial. What does crowdfunding offer that is new?
Crowdfunding is hugely transformational because it has reduced the cost of transaction, and it gives people access, which wasn’t there before. The traditional investment industry is geared towards institutions – that‘s where the money flows to and from - and normal people can’t get in without going through layers of obfuscation through pension funds and the like. All the value is lost to middle men. As our industry grows over the next decade, I see all that changing. Platforms will come to dominate the marketplace, as people realise that there’s no reason why the cost of transaction should be so high.
People talk about the democratic aspect of crowdfunding. But we believe that there is still a role for expertise and due diligence in this transactional chain. That’s why CrowdBnk brings that expertise into play without breaking the crowd model. I don’t believe that the crowd can decide on all investments, if no one checks anything. It’s almost impossible for it to do so.
"Platforms will come to dominate the marketplace, as people realise that there’s no reason why the cost of transaction should be so high."
What are the key metrics you look at as part of CrowdBnk’s due diligence process? How does your process differ from other crowd funders in terms of due diligence?
We meet the management, and look at their capability to deliver on what they say they will do. We want to see commitment, and expertise. Anyone can have an idea, but it’s all in the execution. We put them through a rigorous interview process, and work closely with them on the execution of their plans. That’s followed up with the usual due diligence – whether the market size they’re working to is sensible; whether the business’s projections are realistic. We use our team and our external experts - lawyers, accountants, and corporate finance people – to reach a stage where we are confident the people behind the business have the commitment to execute their goals, and their growth assumptions are achievable.
We’re looking for data-based patterns to say you’ve shown enough traction in terms of customer revenue, contracts and commitment for us to believe that you have a product that could work. Then, we let the investor network decide whether it is going to invest or not. It’s a combination of traditional due diligence, and democratically allowing the crowd to make its decision.
"It’s a combination of traditional due diligence, and democratically allowing the crowd to make its decision."
What are the biggest challenges that the crowdfunding industry faces, and those affecting CrowdBnk, in particular?
The biggest challenge is that until the first success story - by which I mean the first company that’s received investment through our platform, and goes on to provide returns for investors - everything is circumspect in terms of trust. At present, people believe in the idea of crowdfunding rather than the execution. We have to deliver. And, when things go wrong, as they will, there’s the need to manage people’s expectations, to educate them and ensure they know what they’re doing. As an industry, we need to make sure collectively that investors are treated fairly. That’s where the regulator could do more to mandate what we can and cannot do.
Do you worry that there may be a scandal that will cast a shadow over the entire concept of crowdfunding? Are current regulatory measures adequate to prevent this?
Is a scandal likely to happen? I’d say yes. It’s a natural cycle. Any industry gets carried away in the early days, and then an event occurs that forces it to adjust. We’re going through a boom period now, but as soon as the first person loses money there will be a backlash. People will lose money in early stage equity because it’s the highest risk asset class. I expect that to happen, and it should be managed by the industry.
Is the regulatory framework sufficiently geared up to deal with this? Probably not. I think the regulators haven’t really woken up to the scale of crowdfunding, and how fast it’s growing. The worry is that when the first thing does go wrong they overreact and shut down big parts of the marketplace, preventing ordinary people from investing. Regulators are incentivised to prevent trouble, even though they should also be ensuring innovation is happening in the marketplace.
When you speak to the regulators there are the doves and the hawks. The doves are pro-innovation, and they’re starting to get to grips with how the industry works, and how society is evolving. Then, the hawks are hoping that crowdfunding will come crashing down. The reality is that the industry isn’t big enough for the regulators to tackle properly - plus they’ve got their hands full with the banks, and the miss-selling of structured products. But, if you look forward five years, our industry will be big. They should be thinking about gearing up the regulatory structure now, and employing the people able to deal with an industry that will be significantly larger than they think it’s going to be.
What is the future for CrowdBnk?
Our vision is to create a global platform that allows investors to invest in well-vetted companies at the right time. We’ve started with equity, and we’re going into debt. In the future, we’ll go on to offer yet more structured products. We’ve started in the UK, but we’re going into Africa, Canada, and India. Over five years, our vision is that you could be sitting anywhere, looking after your wealth management portfolio using a platform such as ours. You take the risk, you make the decisions, and you keep the upside. You should not need to pay a fee to a wealth management professional to do that for you. We want to disrupt traditional intermediaries. People will come to realise that you can no longer compete just with an office in Mayfair and a retainer-based model, which is where the industry is at present.
"Our vision is to create a global platform that allows investors to invest in well-vetted companies at the right time."
We'd like to thank and acknowledge Sibo Wei (MIM2015) and Rami Banna (MBA2015) for making this article possible.