Spotlight on Equity Crowdfunding

We will look back at 2015 as the year
that crowdfunding entered the consciousness of every type of investor across the world – writes Adam Braggs, Managing Director (Europe) at Crowdnetic.com the financial data and connectivity company.

Over the last 7 years, there has been a revolution in the technological capabilities of financial services providers.

Lean, instant and lower-cost alternatives are now available; these dynamic solutions are challenging traditional financial institutions, and the ubiquity of Alternative Finance and Financial Technology firms is quickly becoming a reality.

‘We will look back at 2015 as the year that crowdfunding entered the conscience of every type of investor across the world’

In the UK alone, the growth of some of the Alternative Finance providers has been astonishing; in total Wellesley have made loans of over £250 million, and Funding Circle over £923 million.

Zopa have lent in excess of £1.16 billion to over 150,000 people since 2005.
This time last year, Nesta and the University of Cambridge projected that the entire UK alternative finance market would grow to around £4.4 billion in 2015. I predict that, upon reflection, this estimate will look modest by the close of Q2.
The explosion in P2P (or debt) lending coincides with the burgeoning equity crowdfunding market, worth just £84 million in 2014.

The concept of equity crowdfunding is straightforward – each member of an investor community, or ‘crowd’, receives a piece of ownership in the company that they invest in. This may be for shares in a start-up, or shares in an established company, or in the case of property crowdfunding, shares in a company that holds a property asset.

What does Equity Crowdfunding look like?

In the last issue, I said I would assess the differences between some of the household names in equity crowdfunding: Seedrs, Crowdcube, Angels Den and Property Moose: first, what do they all have in common?
They each have thousands of members (Crowdcube has nearly 230,000 registered investors), all have successfully raised funds for dozens of exciting projects (Seedrs have funded 250+ business equity pitches), each has an international presence (Property Moose has members in nearly 50 countries), and they have all raised millions using their websites.

half of UK start-ups fail within the first 5 years

There are similarities behind the scenes too: all four firms are backed by venture capital, and perhaps most interestingly, all have raised (or in the case of AngelsDen, are in the process of raising) equity investment for their own growth using crowdfunding.
The similarities continue, but differences appear when we assess their outputs: income for investors, investment risk, and exit plans. It is the differences that make this sector so exciting, but it is important to be aware of the different offerings within the equity sphere.
Income from owning part of a start-up may be elusive for the first few years of its existence. Some companies will never be dividend producing, and others will never aspire to be. The variety of investment opportunities on each of the platforms allows members to select one or more based on their criteria as an investor. No two investments are the same, and there are different risks associated with each.
Investing in any business, even FTSE100, is inherently risky; according to the Telegraph, half of UK start-ups fail within the first 5 years.

With the advent of equity crowdfunding, our attitude to risk seems to have changed; collectively Crowdcube, AngelsDen and Seedrs have funded equity pitches for nearly 1,000 start-ups with thousands of individuals investing.

‘Zopa have lent in excess of £1.16 billion to over 150,000 people since 2005’

These are unsecured investments, and while many of the businesses will flourish, some are going to fall by the wayside. That said, there is now more information available, and a greater level of accountability than ever before: a new company may have hundreds of shareholders all fighting its corner.
Many equity crowdfunding investment opportunities will have no predefined exit strategies so when you will realize a return on investment is difficult to predict.

There may be an IPO in the future, but there is currently no liquid marketplace for your investments. That doesn’t make these bad investments and the government will reward you with some lovely tax breaks for taking some risk and backing non-listed UK businesses.
Property crowdfunding or ‘PropTech’ (a portmanteau I think we will start to see and hear about more often) has a slightly different model.

All funds raised are secured against a real property asset. Members select the property they want to invest in, based on their desired location and property type, and all being well, they will receive returns derived from rental income in month 1. Of course, the value of the property can go down as well as up.
Property Moose Founder, Andrew Gardiner comments that members of the PM community are ‘not just investing in one-off projects, but they are using it as a regular form of alternative investment for income and capital growth […] the reinvestment rate on our platform is more than 78%, so we feel that fixed exits and regular income is what investors are looking for.’

There are other platforms doing the same thing across the world, with Fundrise in the US raising in excess of $40-million to fund its own growth. The potential for a dividend is much higher (easier to tenant a house than grow a business!), and there is a clear exit strategy: there will be no Apple or Facebook style exits, but there will always be one.

Diversity is Key

The growth in the sector is linked to choice: there are now opportunities of all shapes and sizes available at the click of a button. The major players in the equity crowdfunding space are similar because of what makes them different.

The continued evolution of the financial landscape in the last decade has brought us to a turning point. For the first time individuals can now take control of their financial destiny by investing in projects or assets that they are interested in or passionate about. The crowd is growing, and 2016 may be the year that this new industry comes of age.