Seedrs and Crowdcube merger: hot takes

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Simon Taylor Co-founder 11:FS & CPO 11:FS Foundry
5min read

🚨 Breaking news: what happens when two (crowdfunders) become one 🚨

The UK’s two largest crowdfunding platforms, Seedrs and Crowdcube, have announced their intention to merge. While it’s still subject to competition authority approval, this marks a significant shift in the crowdfunding landscape.

But does crowdfunding have a future? Is it just a glorified form of marketing? Or is it a new asset class and the key to financial inclusion for the masses to get involved in early-stage investing?

Meet Crowdcube and Seedrs 👋

The pioneer of the “all or nothing model,” Crowdcube was founded in 2011. That means if a campaign has a fundraising target, then only if that target is hit will Crowdcube take its fee, and the investment is completed out of the pooled capital.

Some of UK tech’s biggest names have listed on Crowdcube, including Monzo (valued over $1bn), Curve, Freetrade, and CarWow.

Unlike Kickstarter or Indiegogo, Crowdcube is often a supplementary form of funding to mainstream VC investment. Series A+ companies use Crowdcube as a form of marketing, engagement, and a way to give back to their early adopter customer base.

Seedrs was founded in 2012 as part of an MBA project from the Saïd Business School at the University of Oxford. Most notably, they helped Revolut raise more than £4m in 2017.

In the past month, Seedrs launched its secondary market platform, allowing early-stage startup investors to sell their shares via Seedrs. In 2020, Revolut shareholders sold over £1.5m in shares at a 598% average profit on the market. Major exits from Seedrs also include Wealthify and Free Agent (acquired by RBS Natwest). It looks like Seedrs are more focused on becoming more of a secondary market platform than a crowdfunding platform.

So, on the surface, the biggest crowdfunding platform is merging with the biggest secondary market platform.

This all seems relatively straightforward, but it still throws up some interesting challenges:

  • Will the competition regulator allow this merger?
  • How profitable are these businesses (or crowdfunding generally)?
  • Is crowdfunding set to go mainstream?

Will the competition regulator allow this merger?

Until recently, the UK had three notable equity crowdfunding platforms: Syndicate Room, Seedrs, and Crowdcube. If this merger goes ahead, it would have just one.

The UK’s Competition and Markets Authority (CMA) is typically involved if there’s a risk of monopoly power over a given industry. (Remember in 2019, when it looked at Facebook’s and Google’s role in the UK?)

But the CMA has played a big part in the evolution of financial services recently.

It instigated much of the UK Open Banking framework with the creation of the CMA9, the nine major UK banks that would fund and form the Open Banking Implementation Entity (OBIE). The OBIE creation then helped to drive many of the formal, regulated API services that the UK now enjoys.

It’s possible that the CMA will see crowdfunding as an area where the risk of a monopoly is hard to call because crowdfunding is already popular in the UK. But crowdfunding is still much more niche than having a self-directed trading account.

So if a company is a monopoly in a small pond, does it matter enough to take action? 🤔

If anything, this reminds me of Plaid acquiring Quovo in 2019. Quovo - technically a competitor to Plaid - was much stronger in accessing investment accounts, 401ks, and some payment capabilities than Plaid was. While the US is a fundamentally different market with different regulators, and the open banking space is more competitive than crowdfunding, there are parallels we can draw.

So if the market is small, I’m not sure what the consumer harm is here, or if there are any real barriers to entry for potential competitors.

So if a company is a monopoly in a small pond, does it matter enough to take action?

How profitable are these businesses (and crowdfunding in general)?

In their 2019 accounts, Crowdcube reported a £2.3m net loss against revenues of £7.6m. (This is a reduced loss over 2018, at £3.1m net loss.)

It’s very fashionable in the UK press to hate on loss-making companies in fintech. Still, in the world of venture capital, it’s entirely reasonable that companies “on the path to profitability” would grow their top-line revenues while becoming more profitable over time.

Seedrs, in its 2019 accounts, says it made a loss of £4.6m with revenues of £4.2m. That’s quite a significant difference, and while revenue is trending higher year on year for Seedrs, their loss is following in the same vein. By combining cost and tech platforms with Crowdcube, their combined revenue and potential cost efficiencies could make sense.

The takeaway here is that this isn’t a massive sector, and Crowdcube appears to be in a better position. It’s interesting then that the share split allocated to the new combined entity announced in the merger was 60% Crowdcube to 40% Seedrs.

It’s very fashionable in the UK press to hate on loss-making companies in fintech.

Will this make crowdfunding mainstream?

It’s hard to say whether this announcement alone will send equity crowdfunding mainstream (the term “mainstream” in itself is quite loaded 😬).

Crowdcube has helped raise upwards of £20m ($25.9m) for Monzo and multi-million pounds for other big names. Equity crowdfunding is only just reaching its stride as a marketing and customer loyalty and engagement platform in terms of mindshare.

So the combination of Seedrs and Crowdcube might not create a mainstream moment on its own. Still, it gives Crowdcube (as the potentially dominant brand) a secondary market platform that helps increase volume, and therefore revenue.

Let’s not forget that much of crowdfunding’s intent is to allow less sophisticated investors access to early-stage companies. In recent years, it’s become increasingly typical for companies to IPO later in life, meaning that by the time a company goes public and people on the street can buy shares, much of the share price growth may have already happened.

Many will argue that keeping consumers out of early-stage investing is a good thing since far more early-stage companies fail than succeed. Given the regulation pre-crowdfunding, is it fair that only wealthy people had the opportunity to benefit from success?

The UK crowdfunding industry tackled these risks head-on when it created its code of conduct for self-regulation, before introducing formal regulation in 2013 by the FCA.

There are lessons to be learned by all sectors of investment from how the industry did this.

They created the consumer’s ability to “self certify” to a level of sophistication to invest and set sensible limits on how much consumers could invest. Put another way, you - the consumer - can certify that you can afford to invest your capital, but the platforms will limit how much you can invest until you have a proven track record of investment management.

Keeping consumers out of early-stage investing is a good thing since more early-stage companies fail than succeed.

So… what now?

Assuming the regulator approves this merger, the UK will find itself with a dominant player in the equity crowdfunding space and an ever-increasing list of companies using this as a model to grow their business.

What excites me is where crowdfunding as an asset class could go from here on out.

With more deals and customers under their belt, their combined secondary market’s depth would drive larger investors to the platform. These larger investors would create more liquidity in private shares and make them more available to the open market. Indeed, crowdfunding may be more attractive as a platform or API-first business than with a front end.

Now, imagine if crowdfunding was something that appeared inside of Robinhood, Freetrade or any of the other investing apps. Crowdcube (or similar companies) would continue to provide the risk management framework and dramatically increase their distribution via these apps.

But that’s just my £0.02.

Whatever happens next, I look forward to watching the trajectory for crowdfunding - as long as we continue to see a sensible approach to risk.