The startup fundraising method this investor thinks is 'extremely dangerous'

ORIGINALLY VIEWED AS a possible gamechanger for startups in the late 2000s, equity crowdfunding has not completely lived up to the hype.

Unlike the Kickstarter and Indiegogo rewards-based framework, equity crowdfunding sees startups swap shares in exchange for funding.

Firms offering equity crowdfunding are yet to emerge in the Irish market, but in the UK where this method of funding has become more mainstream, watchdogs have begun to tighten regulation on their activity.

In 2015 the Financial Conduct Authority delivered a heavy warning to investors when they said “it is very likely you will lose all your money (in equity crowdfunding)”.

Speaking at Enterprise Ireland’s investor day, where over 200 Irish startups were in attendance, investor and CoderDojo co-founder Bill Liao said early stage companies should be wary of how “extremely dangerous” equity crowdfunding can be.

“There’s a reason why public markets are extremely well-regulated. It is because there has been a lot of rip-offs. Equity crowdfunding could be absolutely disastrous.”

Liao, who was an early investor in Irish startup success Storyful, said Kickstarter and Indiegogo are decent alternatives to equity crowdfunding, but these models also have their pitfalls.

“The thing I love about Kickstarter and Indiegogo … is that it proves a good chunk of product-market fit. I think that (those platforms are) also dangerous because you are making a huge promise that you then have deliver,” he said.

“We see a lot of companies that succeed on Kickstarter and then they go into this chasm where they can’t get their supply chain right. So, they have effectively created a debt for themselves. If you apply that gap to the equity crowdfunding model, I mean, it is just a recipe for a lot of disaster.”

€31 million invested in Irish startups

Liao was part of a panel of investors speaking at Enterprise Ireland’s event, sharing advice about the best ways Irish startups can source crucial funding for their business.

Opening the event, Enterprise Ireland director of global business Kevin Sherry said 2015 represented a “record year” of investment for their organisation, with €31 million committed to Irish startups.

Last year 105 new startups qualified for support from Enterprise Ireland under the High Potential Startup (HPSU) track and 15 entrepreneurs from overseas who have moved to Ireland to establish their business were also backed.

In the Competitive Start Fund (CSF), 112 early stage companies nationwide received Enterprise Ireland funding, which is an increase from 81 in 2014.