[Update December ’21: lots happening in the world of equity crowdfunding, including an potential move into blockchain. I share my thoughts in an updated article The future of equity crowdfunding in 2022 and beyond. Crypto anyone?]
[Update October ’20: as of the 5/10/20, Seedrs and Crowdcube are merging. I shared my thoughts in the article The Seedrs and Crowdcube merger: my thoughts]
Originally posted on 08/10/19.
I’ve been reflecting on the future of equity crowdfunding a lot in the last few days. I am absolutely fascinated by the industry, and a combination of events meant that I had put this blog post together:
- Seedrs launched a convertible round yesterday (7 Oct ’19), revealing a lot of their future strategy
- I had an inspiring conversation with Luke Lang, co-founder and CMO of Crowdcube, for The Innovative Leaders podcast
- SeedLegals shared really interesting data on their options for Agile Funding, which I think shows that it’s a real contender for the smaller, early rounds and changes the paradigm of big funding rounds every 12 to 18 months for startups
So, here are my thoughts – I would love to hear from you and start a dialogue about where the industry is going.
The story so far
The Seedrs and Crowdcube platforms launched in the early 2010s with the idea of democratising investment into startups. After the recession in the late ’00s, it was incredibly difficult for startups to access money, so their model was a new way of getting funds from the 3Fs and company clients.
Both platforms had a massive role in shaping the most progressive equity crowdfunding regulation in the world, the one we enjoy in the UK.
And according to Beauhurst, they are dominating significantly the equity crowdfunding landscape with Crowdcube just edging over Seedrs.
Funding
Both platforms have opted to scale up rapidly, delaying profitability and relying on their investors to keep the shop open. According to Beauhurst, Crowdcube has raised £31.7m to date, while Seedrs closely follows at £29.5m, a number that will increase once the current round closes.
As it couldn’t be any other way, part of that funding has come from their communities. They have launched multiple funding rounds on their own platforms. Specifically, £13.52m by Crowdcube and £5.08m by Seedrs, excluding the current round.
The Crowdcube way
Crowdcube has adopted a very entrepreneur-centred approach, focussing their communications on early success stories such as Brewdog. They have had record-breaking round, especially around Fintech, with companies like Monzo, Revolut, Chip and Curve amongst others.
In August 2019, Crowdcube launched a fresh look and feel to reflect the changes they were seeing in the market: Crowdfunding had matured from a pure alternative form of funding to a way to engage with current customers, turning them into loyal advocates. Hard data from Monzo and Chip raises backed up this intuition.
Seedrs take on the market
In addition to engaging with the entrepreneur audience, Seedrs has been very vocal about how they take care of their investor base. Two ways they’re showing this are their secondary market (that has provided an exit to over 10,000 investments) and their published data on the Internal Rate of Return for their investors in their Portfolio Update.
They are now doubling down on this notion with their new strategy, announced in this funding round: creating a market place that offers the liquidity of public markets with the accessibility of e-commerce. Quite a bold statement that will further differentiate them from Crowdcube’s offering.
SeedLegals – complement or alternative?
SeedLegals was born in 2017 out of the founders’ frustration about the high legal cost of closing a funding round for a startup. According to their data, in just two years they are closing 1 in 8 startup funding rounds. Their key strength is an extremely intuitive platform that brings massively down both the cost and time to bring in funding for a startup.
Initially, this could be seen as a great complement of the traditional equity crowdfunding platform models. But with the introduction of SeedFast and Instant Investment, they’re challenging the very notion of the “go-big-or-go-bust” funding rounds every 12 to 18 months. The alternative is agile funding where startups raise small amounts frequently.
The keys to the future of equity crowdfunding (my take)
In my opinion, the future of crowdfunding will be fought on three different fronts.
Key 1: differentiation
We’re seeing the two main platforms diverging on their strategy. Crowdcube is going for a vision of crowdfunding as a great funding and marketing tool, that allows companies to engage with their customer base. While Seedrs is betting for a market place that makes investing in startups more liquid (via the secondary market), easier (with retail and institutional products) and more transparent. For more details, please check their investment deck.
With a completely different model, SeedLegals is going for the ease and convenience of cheap, fast and even ‘rolling’ funding rounds that will appeal to pre-seed and seed companies initially but might make rethink funding for later-stage companies as well.
An interesting landscape, no doubt. What’s the winning strategy? It’s really difficult to predict. As a consultant though, it’s great to see this differentiation, as I’ll be able to offer clear alternatives to my clients.
Key 2: scale
The three alternatives have business models that will rely heavily on scale. Even if the 6-7% success fees might seem steep to the entrepreneurs, the reality is that the platforms have important fixed costs to cover and they will need to increase their number of deals significantly to get to profitability.
Which strategy will deliver more scale? The great marketing appeal of Crowdcube for entrepreneurs? The (arguably) superior offering of Seedrs for investors? Or is it going to be the convenience of SeedLegal’s model?
Key 3: international expansion
Related to the second key, a massive driver for scale is going to be the international expansion. Seedrs and Crowdcube can promote their investment opportunities under the FCA rules to most markets (notable exceptions are the United States, Canada and Japan).
International companies can be listed on these UK based crowdfunding platforms. They will have to follow their national legislation to close their round. And here’s where SeedLegals offering is less scalable, as it will need to go country by country following the specific legal regulations.
In any case, is a massive scope for the three companies to grow internationally. Crowdcube has been very active in Spain since its foundation. Seedrs has been historically strong in Portugal and Benelux, where they have sales teams. In my opinion, the first company to bet strongly in each new market will have a better chance to corner it.
I would love your opinion
So, what do you think? I haven’t had time to reflect on quite a lot of questions:
- How much is the market as a whole going to grow? Or is it now a market share game?
- Is this market a winner-takes-it-all sort of space?
- Will the SeedLegals model make a real dent in the crowdfunding space? Or will it be seen as a great complement?
- What other alternatives could arise in the future?
I would love to engage in the conversation and discuss where the future of equity crowdfunding lays. Please feel free to comment down below or drop me a line via my online form.
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Amazing article, Adrià. In my opinion we’ll see a considerable market growth in the next years. The market is still on growth phase and we’ll see not only more start-ups accessing to equity crowdfunding but also some of them repeating the strategy. In fact, some of my clients, as Vytrus Biotech has already launched more than one crowdfunding round. I also think we’re not on a winner takes it all market but in a market that could have two big companies leading it. Just the same we see on reward-based crowdfunding market with a clear leader (Kickstarter) and a follower (Indiegogo). In any case the market will evolve in the future, maybe adding more services to the platform offer in order to make the model more sustainable.
Thanks for your views, Valentí. I do think in fact that there is still work to do in terms of awareness of this funding option and as both parts of the equation (startups and investors) get more familiarised with it, the market will grow.
The main challenge remains though: the really tough business model of getting just 6-7% of the success fees (often less). The platforms have been showing that they will become profitable ‘in 2 years’ but in every funding round they seem to be pushing that milestone down the road.
Exciting times indeed and with new models coming in, like SeedLegals, the market could be disrupted.
Great article Adria. I believe that the future of equity crowdfunding is going through the secondary market. I think it will be the next step in equity crowdfunding for the next 10 years.
Hi Aberto, thanks for your thoughtful comment! Seedrs is making progress on that front and it seems it’s a central part of their new funding round. Crowdcube dabbled with it in the past, but it doesn’t look like it’s a part of their strategy. I’ll ask them if that’s the case!