Equity crowdfunding: a crowded field set to keep growing

In October last year the two biggest equity-crowdfunding platforms in the UK, Seedrs and Crowdcube, announced that they were hoping to merge. At that stage this alternative world of early stage business funding appeared to be in poor shape, especially during the first phase of the pandemic when investors ran for the hills.

The merger seemed a solution to these woes: as Seedrs observed in a report, the deal would be “a pro-competitive transaction that, first and foremost, is about the survival and sustainability of an innovative method of equity-finance in a David versus Goliath battle against the established providers of equity funding” for small and medium-sized businesses (SMEs).

And then last month came the news that the competition watchdog, the Competition and Markets Authority (CMA), had scuppered the deal. The regulators worried that the proposed merger “may be expected to result in a substantial lessening of competition... within the supply of equity-crowdfunding platforms to SMEs and investors in the UK”.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

You might have thought this news would result in panic in the crowdfunding sector, but I talked to Crowdcube last week and there seem to be signs of increasing confidence. It looks as though both platforms will survive; in fact, Crowdcube told me that its revenues hit all-time highs in the second half of last year and it was forecasting profitability in the subsequent six months. These platforms are probably going to remain a part of the investing landscape for some time yet.

Equity crowdfunding is not just the young

All of this prompted me to dig around a little more into what investors actually do on these platforms. I’m sure we can debate endlessly whether the returns investors have made through the growing number of exits (whereby investors cash out thanks to a flotation or a sale of the company to another business) on both leading platforms outweighs the obvious risk of companies failing. What interests me more are the practical issues: who actually invests on these platforms and how do they go about building portfolios of investments in risky, early stage businesses?

My sense is that most investors think that crowdfunding is probably only for young people who love to dabble in backing breweries or next-generation consumer brands. But I’ve never been entirely convinced by this caricature. Like many grey-haired 50-somethings, I have been investing capital on both platforms fairly regularly for the last two to three years. And having talked to other colleagues and friends, my impression has been that most investors are probably aged between 40 and 60, with an average stake per “campaign” in the hundreds of pounds, all within a portfolio comprising around five to ten investments per person.

That certainly fits my profile: I have made a total of 15 investments over the last three years, with the average sum around a few hundred pounds and a maximum of £2,000. My view is that equity-crowdfunding serves a useful purpose for 1% or 2% of one’s total investments, sitting alongside venture-capital trusts. Again, like most friends and acquaintances I talk to who crowdfund, I tend to focus on certain niches, in my case fintech businesses. As with any investment I opt for what I understand.

How much are the rich risking?

But does the data from the platforms back up my hunches? Looking at Crowdcube’s numbers provided to me this week – and I assume that Seedrs’ data wouldn’t be too different – the answer seems to be yes.

Crowdcube reports that 62% of its investors are either high net-worth (HNW) individuals or sophisticated investors, with the average age of this group in the 50s. Looking at these wealthier types, the average portfolio size is £15,000, the average number of investments is eight and the average investment per campaign, or pitch, is £1,800.

Looking more specifically at the top 25% of HNW and sophisticated investors, the average portfolio size increases to £50,000, with the average investment per pitch at £3,383, and the mean number of investments at 15.

Crowdcube also provides some useful data on how this category allocates its cash between different stages in the life-cycle of a business: £50,500 in total goes to early-stage businesses, £46,000 to growth investments (established companies ) and £21,000 to seed, or pre-revenue, firms.

If we look at the wider investor base – let’s call them the everyday investors – the average portfolio size is £2,093, the average number of investments is five and the typical investment size is £390. And for all types of investor the average is a professional who lives in southeast England or London.

Looking at both categories – everyday and wealthier – Crowdcube reports that “the amount of investment has gone up each year overall... [however, people] are investing slightly lower amounts year-on-year but into a greater number of companies, so they are diversifying their portfolios”. Crowdcube reports that in 2020 fintech was its most popular sector, followed by mobility (e-bikes and e-cars), healthtech and cleantech. I think most investors are behaving sensibly. It looks as if they are allocating no more than 1%-3% of their total portfolio to these riskier investments and they are diversifying, across five to ten different pitches. Despite the CMA’s ruling, I think the sector will keep growing.

What it really needs now is a run of big wins where investors take home many multiples of their initial investment. Maybe some of the cash-hungry fintechs constantly raising cash will deliver on their promise?