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Questions about GrowVC's crowdfunding platform

By Trampoline Systems | Thursday, March 4th, 2010

A couple of weeks ago Hong Kong based GrowVC came out of closed beta and launched their crowdfunding platform to the world. I was excited because GrowVC was described an “equity crowdfunding” platform, implying that investors receive equity in the businesses they back. To my mind this is an essential requirement for any platform that’s serious about bringing private capital into start-ups. The path from formation to exit is frequently long and bumpy. Only equity ownership can provide investors with strong enough assurance they’ll get a fair return at the end of the journey.

All previous platforms have shied away from equity ownership. After the experience of structuring Trampoline’s equity crowdfunding process I can fully understand why. The thorniest regulatory conundrums are concerned with situations where people put in cash and get equity. Consequently crowdfunding platforms like Bandstocks and Sellaband (which has recently seen some turbulence of its own) have tended to structure themselves as clubs. In this model investors pay a membership fee which gives them the right to a share of profits from projects they back. No equity changes hands.

However after registering with GrowVC and spending an hour on the platform it looks like there’s no equity element after all. Disappointingly the platform appears to be structured on the club model. Entrepreneurs, investors and “experts” pay a monthly (or annual) fee. 75% of the fees are invested in ventures selected by the investors. 75% of the money from a venture that reaches exit is distributed to the investors who voted for it.

If this analysis of GrowVCs model is correct I don’t believe it has any chance of succeeding. The relationship between an investor and a venture is indirect and woolly. What happens if a venture is restructured? Or if an entrepreneur issues equity to investors outside the GrowVC scheme? GrowVC investors have no control and little security regarding the ventures they back. Under such circumstances no intelligent investor will be comfortable staking more than pin money.

It’s a shame because the platform looks well-designed and the world really could do with a proper equity crowdfunding platform. We’ll just have to wait a little longer.

This entry was posted on Thursday, March 4th, 2010 at 7:56 pm and is filed under Crowdfunding. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.


3 Responses to “Questions about GrowVC's crowdfunding platform”

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  1. Duncan Work says:

    In a “club” model, can’t the club collectively own equity in the venture? If so, then it seems that the members can get the same protections as any other preferred-share investor?

    There must be some way to address the regulatory issues you raised. E.g., look at mutual funds. There are no restrictions on who can invest in a mutual fund.

  2. Charles Armstrong says:

    @duncan if the club owns equity in the venture but the investor only has “membership rights” in the club i believe that’s still too weak a link to work for serious (ie >£1,000) investments.

    on your second point, it’s true that anyone can invest in a mutual fund. however the regulatory effort involved in setting up and operating a mutual makes it unattractive for mainstream crowdfunding purposes.

  3. TW says:

    Completely agree with your analysis. They are asking investors to pay in order to invest in start-ups. Their platform and concept are flawed. Seriously, all investors need to do is to tell people that they got money to invest and start-ups will flood to them. Who needs to pay for the ‘privilege’ of backing a company?

    One may argue that members of an angel group may need to pay an annual membership fee too. But who are we kidding? This platform is not an angel group. Intelligent investors won’t sign up; smart entrepreneurs would know better. This means the deal flow in their system is likely crappy.

    I heard they are trying to roll out in many different countries. Maybe they will succeed if they got enough fools to sign up. I have seen much better crowdfunding platforms.

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