The future of equity crowdfunding in 2022 and beyond. Crypto anyone?

The future of equity crowdfunding in 2022 and beyond has just taken an incredibly interesting turn. After the frustrated merger of Seedrs and Crowdcube, something had to happen. As I explained on my article, the current business models of the crowdfunding platforms are broken. A bit of a shake was needed.

News in the equity crowdfunding European Landscape

On the 23rd of November, it was announced that Circle was leading a new founding round at Crowdcube. Circle owns SeedInvest (one of the main equity crowdfunding platforms in the US), one of the main promoters of USDC (a crypto based ‘stablecoin’) and has the stated their intention to “focus resources on global social payments and future next-generation blockchain technology”. Shortly after, Crowdcube started rallying their community for an equity crowdfunding round, capped at £2m. [Update 8/12/21: Crowdcube has raised the £2m in an astonishing 13 minutes this morning. Mind blowing!]

And then, on the 1st of December, Seedrs being acquired by Republic. Republic is also one of the main equity crowdfunding platforms in the US and has shown signs of being very interested in the crypto space. They even run a Twitter account just on crypto! Republic has confirmed that they will invest to the tune of £20m to further scale Seedrs.

Why are these news meaningful

The recent change in the European crowdfunding regulation meant that the market was ripe to scale up. But that meant investment. And it came in the shape of an acquisition and an investment round in the two main European platforms.

But reading beyond that, both Republic and Circle’s strategy around blockchain are quite telling and will have a massive impact on the future of equity crowdfunding in 2022 and beyond.

One of the main problems of investing in startups is liquidity. As an investor, you cannot sell your shares on a startup to invest in another one. Seedrs secondary market made a little steps towards liquidity. But the idea amongst mainstream investors remained: if you invest in startups your capital is tied up for at least 5 to 7 years.

And here’s where crypto comes in. Some pioneers in the space such as Balaji Srinivasan have stated, the killer app for blockchain applied to start up funding is just that: liquidity.

As he mentions in one of his blog posts:

A token has a price immediately upon its sale, and that price floats freely in a global 24/7 market. This is quite different from equity. While it can take 10 years for equity to become liquid in an exit, you can in theory sell a token within 10 minutes — though founders can and should cryptographically lock up tokens to discourage short-term speculation.

Balaji Srinivasan – Thoughts on Tokens

It’s worth mentioning that a token sale is more similar to rewards-based crowdfunding (think Kickstarter) than a ‘traditional’ equity crowdfunding. But the use of the funds would not be to fulfil the delivery of a reward but to scale up the startup.

This is one giant step more on the trend we already see in equity crowdfunding of users/customers as investors. The use of tokens, further democratises investing in startups and it makes it a much more interesting asset class for more traditional investors.

Does this mean that the European platforms will move straightaway into blockchain?

Well… not so fast…

As my dabbling into the crypto world has shown me, we’re still on the very early days. It really feels like the Internet in the 1990’s. It’s still difficult to onboard new users for crypto in general. For mass adoption, it should be as easy as it is today to make purchase on Amazon or creating an account on Twitter. That’s why people like Balaji are favouring a model where Fintech = frontend, Crypto = backend. But I think this is still a few years away in the case of Seedrs and Crowdcube.

Even if we can get around the user experience problem (and I’m convinced we will in the next couple of years), the arch-villain of equity crowdfunding will still be waiting around the corner: regulation. We’ve seen how it’s stifled the potential of equity crowdfunding in the past and the step forward they’ve made recently is still years behind the state of technology.

My personal view of the future of equity crowdfunding in 2022 and beyond

In terms of the news themselves, after having a leading industry in Europe and specifically in the UK (over 30 times bigger as a % of the GDP vs. the US, according to Sahil Lavingia founder of Gumroad), it’s a shame to see that leadership taken away. As Circle has a minority stake in Crowdcube, they will still have a significant say on their strategy.

The new European regulation will allow both platforms to continue their growth. Crowdcube is slightly ahead with their dual license.

Crypto comes into play in the European crowdfunding scene, especially with such new investors to the main European platforms. But crypto is still in its infancy in terms of user experience and the UK and EU regulators will want to have their say on the matter.

What do you think?

I would be really interested to hear your take on the topic.

As always, if you’d like to discuss with me anything related to crowdfunding, please don’t hesitate to contact me.