Is crowdinvesting deceiving the masses?

The concept is good. Leveraging the power of internet to raise funds, collect people’s ideas and gather comments and feedback from around the world, how amazing it is! The concept is so appealing, hundreds of crowd-funding sites have been set up, each focusing on a specific sector or country. I believe it is particularly powerful when the project owner itself upload his idea and look up for direct support and donations from thousands of people.
It becomes a little bit trickier when it comes to investing, meaning that the user do not simply donate 50$, but he actually “invests” 50$ (or 500$ or 5000$) expecting it to come back, preferably with some return. So if, as a business owner, I want to raise USD 50,000, I would have to convince 100 users to invest USD 500 on my crowd-investing profile. The risk is therefore shared between dozens of people, there is no minimum to step in and everyone is happy. This is particularly seen as a very effective solution for risky businesses (mainly at the concept stage) rejected by banks and VCs. The only choice left is getting some support online, hopefully leading to some sort of financial success that would allow the first believers to be paid back with good compensation. Hence it might be an effective solution to a kind of  “market failure” leaving businesses with high potential off the mainstream funding. With some good regulation and strong references checks, thieve, fakes and other abuses can also be kept away.
But the problem I am trying to point out here is not with scams, but with the very genuine businesses and organizations using crowd-investing to raise funds. I feel sometimes they tend to fool people and take advantage of their enthusiasm and eagerness to have an impact through their micro-investment. To put it in black and white, John is a business owner and can get USD 100,000 from a bank at let’s say 5%. He has to comply with conditions, report to the bank, get inspected etc. On the other hand, he can go on a crowd-investing platform, get checked (no problem) and raise funds at 1 or 2% from 500 people. Cheap money without any accountability. Each of those 500 spent 10 minutes reading his presentation (is it worth it to spend more time for 500$ anyway? And remember they are making impact!), clicked on the button and moved on to their Facebook account. John can even do more than that: he can take the bank funding AND the crowd-investing money, overall decreasing his funding costs and maybe gaining an unfair advantage toward the competition. The users got fooled twice: they are investing at cheaper rates while thinking they are the only source of money for SMEs. Not a big deal anyways for a 500$ investment. Look at Eureeca, for instance. I genuinely think they are doing great work. They spent huge efforts putting the platform together and fixing the legal issues. I really like the processes they have designed to back the user and the entrepreneurs, and it is quite an initiative for access to finance in the Middle East. But then let’s look at the funded companies: 100,000 for 6% of the shares? Really?? They merely started the operations, no proof of concept and they value themselves at more than USD1.5mln already. And 23 people accepted these terms and invested an average of USD 4500. They didn’t care maybe or they were not aware of what this really means in terms of risks they are taking. As a micro-investor, you have no leverage and you do not care. Maybe someone should take the money of the 23 and negotiate on their behalf? It is called Private Equity funds and they are much more expensive.
Same business for the micro-lending platform (see Kiva.org or to stay in the Arab World, its counter-part  ): you are having a great impact, you are changing lifes with only 50$.  Again, they are doing great efforts in terms of giving visibility to Microfinance and its benefits (and as an investment officer working in that area, I can only be grateful). But they take your cheap money (no wait… your FREE money as they do not pay you interest) and they lend it for free to microfinance institutions (MFI, in some way, banks for the poor). Are these MFIs, thanks to this free money, lending at lower rates? Do they really need that money coming from crowd funding? Are they really changing lives? Again, I am not sure. The user, here again, has been somehow fooled: he believed he had an impact with free money that actually might have just added some margin to the end institution.
The solution in my view is for these micro-investors to require much more accountability. Maybe we will end up with the Association of Micro-investors. When you (micro) donate, it is all fine, but when it comes to micro-investing, it is a different picture: you have businesses with markets, competition, costs, behind it, and any lack of rigor will end up sooner or later with big abuses at worst and with a bad hangover at best.

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