In preparation for a new article on Biotech Crowdfunding in 2018, Niall Kirk, Director at Optimum Strategic Communications, profiles this alternative source of capital while introducing readers to the online crowdfunding marketplace
Since the advent of equity-based crowdfunding in the UK in 2011, the sector has seen rapid growth in capital raised and the market is now worth an estimated £220M to crowdfunded firms. Crowdfunding investors seek high returns from the high-risk investments they make, and benefit from exemption from capital gains tax on profits through the SEIS and IES tax initiatives in a well-regulated market. While there are hundreds of crowdfunding platforms that have launched in the UK, the leading ones include CrowdCube, Seedrs, SyndicateRoom and VentureFounders – innovative platforms that control the vast majority of the market.
The £220M UK equity-based crowdfunding market is dwarfed by the £3B put into UK firms by venture capital in 2017, but crowdfunding is an attractive, early stage, rapidly developing source of capital for many innovative UK firms.
Success stories in the Crowdfunding market include E-Car Club, Camden Town Brewery, FreeAgent, BrewDog, Monzo, Revolut, Mettrr Technologies and Zanc. These companies have given their crowdfunding investors potential exit events and made significant returns for them over the long term. There have been some notable failures in the UK crowdfunding market including Rebus, Ridelink and The Solar Cloth Company, but this is expected across all regulated markets and illustrated by the historic collapse of US SEC-regulated mega-cap companies such as Enron, Tyco and Tenet Healthcare amongst many others.
Outside of the consumer and healthcare sectors, the key sectors that crowdfunding has heavily invested in and made rewards from are FinTech and artificial intelligence. We have talked about these sectors in previous blogs commenting on Estimize and their use of crowdsourcing and artificial intelligence to create new consensus numbers which give hedge funds an edge to add alpha to performance.
In order to increase liquidity in the crowdfunding space, Seedrs have launched a secondary market enabling existing shareholders to sell their shareholding without the usual liquidity event of an IPO or buyout. SyndicateRoom has launched a Growth Fund to allow private investors to gain exposure to a basket of SyndicateRoom later-stage companies, and has launched Fund28, a more diversified algorithm-based model to allow individuals to gain access to a broader range of their portfolio companies.
Based on recent data, growth in funding has slowed over the recent years and crowdfunding has lost some of its allure. There are many reasons for this:
• Maybe the slowdown in crowdfunding is just about boredom, with crowdfunders not getting the profits they expected as soon as they expected. Google Trends is a good indicator for the popularity of new themes (and is a key correlation indicator for the cryptocurrency market performance). Searching Google Trends shows the lack of current interest in both crowdfunding and crypto
• Crowdfunding investors and companies may be worrying about Brexit and how their investments will stand post-Brexit.
This hesitance has not been seen in the VC markets, with UK firms raising £3B in VC funding in 2017, 2x that of 2016, showing VC confidence in UK companies post-Brexit
In addition, the EU is keen to attract crowdfunding to Europe particularly for FinTech companies and the European Securities and Markets Authority (ESMA) proposes a MIFID light, Financial Services Passport for crowdfunders to match investors and companies all over the European Union, creating a single European crowdfunding market.
Crowdfunding firm Seedrs has already advanced its business model to crowdfunding across Europe based on the potential backing of a Financial Services Passport
• Maybe investors and companies are spooked by new regulations proposed by the UK FCA which include proposals to ensure investors receive clear and accurate information about a potential investment and understand the risks involved and to ensure investors are adequately remunerated for the risk they are taking.
To counter this, there are signs of a slowdown in the US crowdfunding market as well, the highly popular Kickstarter platform has seen a similar slowdown in deals as the UK crowdfunding market. The US investor certainly isn’t worrying about Brexit and already suffers much more onerous SEC regulations on crowdfunding (Reg CF) than we have in the UK.
• VCs may be getting more deal hungry, they are awash with cash and after seeing historic deals they passed by being made successful via crowdfunding, they may be rethinking their strategies and taking crowdfunding market share
• Crowdfunders, seeing that returns from cryptocurrency initial coin offerings (ICOs) are so much larger and nearer-term investment opportunities compared to crowdfunding:
In 2017, many high-profile cryptocurrencies would appreciate as much as 300% a day, making the returns from crowdfunding look lame. ICO investors are not crippled by the Reg CF regulations, and I can’t imagine many ICO investors thinking about paying capital gains tax. Returns from ICO investments hit a peak of 23x in 2017 but are now reaching 0. It will be interesting to see how crowdfunding deal-flows develop in the near term now that crypto returns are unfavourable
• Finally, companies themselves seeking funding may be looking at an ICO route rather than crowdfunding, where they can access significant amounts of investment with no regulatory burdens in a very short period of time. Based on figures from ICORating, 32 UK ICO’s raised $200M in 2017 (based on country of origin of CEO/founder). To put this into perspective, UK ICO’s can raise an average funding of around £4.75M, compared to an average of £600K raised through crowdfunding
To conclude, we see the reason for the slowdown in crowdfunding in the UK not just to be caused by Brexit or increased regulatory burdens, but may be caused by investors and companies themselves seeking alternate investment strategies such as ICOs, and by VCs gaining back market share after learning from crowdfunding success. We continue to believe the UK crowdfunding market is a viable, successful and sustainable business model.
Data source for Crowdfunding market derived from Beauhurst data, ICO return data from Argon Group, UK ICO data from ICORating, UK VC data from London & Partners.