Gone are the days when private companies were limited to private equity or venture capital when looking for equity funding. The rise of online crowdfunding platforms over the last few years, along with other digital financing solutions such as iwoca and Market Invoice, have completely altered the landscape of options for these companies.
Research conducted by Beauhurst on 2016 UK funding deals for non-listed high-growth businesses concluded that crowdfunding outperformed private equity and venture capital. Whilst 2016 saw a decline in the total number of deals financed by equity investors, activity on the leading crowdfunding platforms increased. Crowdcube (launched in 2011) and Seedrs (launched in 2012) accounted for 21% of such equity investment in the UK last year. A few years ago, it was typical for crowdfunding to be associated with early stage startup businesses. However as certain platforms affirm their position as a credible route for finance, crowdfunding has been attracting more established businesses, with larger sums being raised. Additionally the market is now starting to see the first exits from investments made via equity crowdfunding, providing a measurable output of the returns from these forms of investments.
According to Beauhurst’s research, Q1 of 2017 has seen a small increase of 2.7% in equity funding in non-listed, high-growth companies. However deal numbers are still 6.72% lower than the same quarter in 2016. The growth has primarily been driven by crowdfunding platforms, with an 11% growth in deal numbers.
As we live in an increasingly digitalised world, institutional money is now entering the equity crowdfunding marketplace and as such larger fund-raisings are set to be more frequent. The interest from the likes of venture capital funds is a result of crowdfunding attracting an increased number of companies that are categorised as “growth stage” rather than seed investment. Crowdcube, the largest crowdfunding platform by deal volume, has said that the number of deals involving institutional investors alongside retail investors had quadrupled in the past two years.
Further cementing the place of equity crowdfunding in the fundraising landscape, Natwest has formed an exclusive partnership with Seedrs. The platform is included on a panel of alternative funding solutions which the bank will signpost its business customers to, in instances where traditional funding routes are not the best option for their customer.
We have seen a number of our clients opt for a round of crowdfunded finance – sometimes coupled with another more traditional form of funding. Feedback from these clients’ shows that just like other forms of funding, securing crowdfunding has its own challenges. In common with efforts to secure a more traditional form of funding, running a crowdfunding campaign is time intensive and does require dedicated team resource. Being prepared ahead of approaching a crowdfunding platform is key, including having financials, forecasts and (S)EIS assurance in order. The success of a raise is often hinged on securing those all-important, credible early investors – often companies will have those individuals lined up before going live on the crowdfunding platform (which has been common amongst our clients). Once a company sets a target raise and launches their offer, it is imperative that the communication to the market is frequent and that the momentum is sustained for the duration of the campaign. Companies are also realising the importance of connecting with investors who are enthusiastic about their product or service and who, as a result, will evangelise about their offering to others.
Another recent and important development for the market, is Seedrs’ launch of its secondary market. Seedrs expect their secondary market to increase the appeal of equity crowdfunding, which introduces the prospect of a liquidity event sooner than an IPO, trade sale or other form of exit event. For the first time, investors will have the potential to sell shares to other investors in companies they’ve invested in via Seedrs. Likewise, investors in Seedrs-funded companies will have the chance to increase their stake. At present the market is being operated within a number of parameters, including only existing shareholders in a Seedrs company being able to acquire secondary shares and trading on the secondary market only taking place during a one week window every month. However if the market continues to be successful as a pilot, it is expected that Seedrs would widen its accessibility. It is also likely that other crowdfunding platforms will follow suit and open their own form of secondary market.
In recognition of the emergence of equity crowdfunding as a leading form of alternative finance, the FCA has, since 2014, increased its regulation over the market. It is placing increased efforts on improving transparency around financial promotions and protecting the interests of retail investors. The FCA has voiced concerns over investors’ ability to understand the risks and returns of crowdfunding, the information in marketing material not always being “clear, fair and not misleading” and investors not being able to easily compare platforms with each other. By the end of 2017 it is expected that additional regulatory requirements will be placed on crowdfunding platforms.
Across Europe, crowdfunding is quickly moving from a fringe funding, alternative form of investment to becoming a mainstream route to finance – connecting many individuals to fund businesses. In its published “Report on Crowdfunding in the EU Capital Markets Union”, the European Commission describes crowdfunding as, “an important source of non-bank financing in support of job creation, economic growth and competitiveness” (European Commission 2016). Crowdfunding has put a defined and permanent stamp on the funding environment. As with other forms of investment in private companies, whilst an investment through a crowdfunding platform can give no guaranteed return, the existence of these platforms can overall only be a positive development, increasing early stage, high growth and scale up businesses’ accessibility to capital and broadening investment possibilities for investors.
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