The firm's sole proposition at launch in 2011 was an investor-led equity crowdfunding platform that let users co-invest alongside experienced investors in highly sophisticated opportunities.
Its business model was further augmented once it secured intermediary status with the London Stock Exchange in March this year – thus elevating itself above rivals by becoming the first crowdfunding platform to join the public markets.
The deal with the LSE provided a pathway for ordinary people to participate in fundraising exercises carried out by the biggest firms in the country that are typically reserved for large funds.
The Financial Conduct Authority regulated Cambridge-based company eyed participation in the initial offering of shares in the part privatisation of Lloyds Bank, but the government has since abandoned plans to launch a major retail share offer.
Use of the platform commands a relatively steep minimum investment. The figure is £1,000 – preventing anyone making an investment decision on a whim.
At the time of writing, the platform has raised more than £57m. In addition, the company’s portfolio for 2014-15 was valued at 135 per cent of the original investment.
The firm diversified its proposition further with the launch of its maiden fund, called Fund Twenty8, which invests in Enterprise Investment Scheme opportunities.
While most EIS funds have between five to 10 investments focussing on a single sector, Fund Twenty8 will hold at least 28 companies within the portfolio across a broad range of sectors, according to James Sore, SyndicateRoom chief investment officer.
However, the portfolio is currently biased to technology, healthcare and life science sectors, which make up about two-thirds of the fund, he said.
The fund is designed to bring the traditional fund management strategies into the crowdfunding industry, but the management of the product differs from typical investment funds.
Rather than relying on a single fund manager, SyndicateRoom works with a team of business angels, venture capitalists and other lead investors from the angel funding stage – that is, prior to the crowdfunding process.
The firm vets the lead investor of the angel stage to ensure they have the credentials to fully manage the investment – including demanding changes in governance if and when applicable.
Mr Sore, said: “We realised that if we wanted to have a fund that invests across multiple sectors, we would need a team of people who specialise in that sector. Hiring our own team would not be economical.
“If there is a very big disconnect between the lead investor and the company, we would flag it and ask questions like ‘why did the individual invest in the company in the first place?’ Just because you have invested a lot of money in a company, it does not mean that you are the best person to manage it.”
Mr Sore said among a list of requirements for companies seeking to list on the platform is a requirement to have 25 per cent of the equity sought already committed. So if a company targets to raise £1m on the platform, it must first have secured £250,000 of initial investment.
A minimum equity funding round of £150,000 is also applicable and the company must offer SyndicateRoom investors the same share class and price as the lead investor.
The fund has been given the tracker label because it observes the appetite of SyndicateRoom members who, Mr Sore said, are sophisticated investors putting in their own money, to determine how much capital to allocate into each investment.
The firm does this on a pound-to-pound basis until the company’s funding is met. If an investment is oversubscribed and goes into overfunding, the fund then invests more, securing a larger weighting.
Mr Sore said: “Banks are offering next to nothing in the current low interest rates environment and the yield of low risk debts is not that impressive. The fund can be a valuable part of a balanced portfolio.”
A school of thought argues that EIS funds have a skewed focus on helping investors mitigate their tax liability – whether they are looking to defer a large capital gains tax liability or reduce inheritance tax liabilities – rather than seeking to generate impressive returns.
Mr Sore disputed this, claiming Fund Twenty8 is an investment fund first and a tax planning solution second. In fact, the fund was developed based on industry research on early state investment performance.
This includes research carried out by innovation charity Nesta, which found that business angels and venture capitalists can generate returns, on average, in excess of 20 per cent.
SyndicateRoom’s rapid expansion shows no signs of subsiding. It raised £3.1m in a series A funding round – £8m more than its initial target, which was reached after only 10 hours after the funding event went live on its platform.
The funds have been earmarked to support its aggressive growth strategy over the next six months, including its expansion into the equity capital markets and doubling the number of staff it employs.
Steve Carlson, chartered financial planner and tax adviser at Cardiff-based Carlson Wealth Management, said: “I would say that most IFAs do not have significant knowledge of crowdfunding and I do not know whether they should.
Personally, I don’t see how I can offer advice on crowdfunding because I do not know how to assess the risk.
There is data on how crowdfunding investments returns, the screening processes, and the frequency of defaults. Crucially, crowdfunding does not have form during an economy downturn which makes it almost impossible to recommend.”
On EIS funds, he added: “You should never use funds with a sole purpose of reducing tax liability because if a company folds, the tax advantage goes straight out the window. However, the tax benefit could make a 50-50 investment a bit more palatable.”
Myron Jobson is a features writer of Financial Adviser
Key points
SyndicateRoom started by helping early start-ups raise seed capital for their enterprises.
It was the first crowdfunding platform to join the public markets.
A requirements for companies seeking to list on the platform is the need to have 25 per cent of the equity sought already committed.
