Posted on 8th August 2016

Blog: Play-offs in European equity crowdfunding begin

Volumes of capital raised by equity crowdfunding platforms are strongly on the rise, while recent data point to slowing growth rates for new platform launches. Transactions are being concentrated to more dominate players, and less active operators will unavoidably – like the “old soldiers” described by General MacArthur – just fade away…

The dynamics of market place business models are pitiless, and largely governed by winner-take-all logic. The equity crowdfunding industry is due to enter a consolidation process, during which weaker players will fold, or be taken over by stronger ones. The strong ones attract traffic and capital, both of which drive value, and enable them to raise own financing for expansion and product development. Some factors, however, suggest there will be room for a more diversified group of platforms. Like in public equities, investors in non-listed companies are likely to show a home bias, possibly reducing the synergy potential in cross-border M&A initiatives. Also, some platforms already differentiate by focusing on particular segments on either side of the “market place”. For example, on the investor side, minimum ticket is set higher to target a more affluent, and demanding, audience (e.g. EUR 10,0000; Innovestor), or, on the company side, strict selection criteria are applied with respect to offered campaigns (e.g. focus on specific industries/sectors; CircleUp). Another differentiating factor is “skin in the game” – some platforms operate like VC in the sense that they contribute own capital to the financing rounds (e.g. 5-10%; Innovestor).

Economies of scale will be an important consideration going forward. In the quest to maintain cut-throat growth rates, leading companies need to aggressively expand both the investor base and quantity of campaigns brought to the platform, all while preserving the delicate equilibrium between supply (projects) / demand (investors) and quality of campaigns. Simultaneously, powerful financial institutions are entering the fray. Most recently Nordea Bank, the largest banking group in Northern Europe, announced the launch of an own equity crowdfunding service (04/2016). Evidence from UK, the most developed equity crowdfunding market in Europe, indicate the business is gradually being institutionalized, with the share VC funds and angels on the rise in “crowd syndicates” (Nesta 02/2016). More sophisticated investors mean higher expectations on vetting capabilities, or technologies, possessed by origination teams. Not everyone can play in the premier league.

Nimble fintech companies rely on a continued drive to innovate and disrupt, thereby staying one step ahead of competition (and potential entrants). In terms of product development, the emergence of secondary markets for capital invested through equity crowdfunding platforms is set to further boost the attractiveness of the instrument. The only viable exits routes for shares in non-listed companies have traditionally been M&A or IPO situations. Secondary markets present investors and companies with a third choice: to remain private, but still provide an opportunity to exit through an organized legal / institutional process. Secondary trading already takes place, principally on two types of sites: 1) own market places developed by platforms, and 2) separate private company lists on “early-adopter” stock markets. This form of liquidity is a game changer for the over half billion euros raised on equity crowdfunding platforms in Europe since 2014 (Crowdsurfer 05/2016), and significantly lowers the hurdle for future investors considering investments in non-listed companies. The challenge, of course, is to sustain adequate trading volumes on the market place, perhaps forcing platforms to act as some kind of quasi market makers (which comes with balance sheet, knowledge, and often, regulatory requirements).

Regulation is slowly but steadily catching up with the industry. Different forms of “lighter” authorizations tailored for the specific needs of equity crowdfunding are being introduced in many countries by local regulators (latest Finland 04/2016). Some platforms already conduct business under full scale FSA supervision. Unregulated platforms will no doubt continue to operate (in some counties), but their room for manoeuvring keep shrinking. The fresh EU commission working paper (05/2016) on crowdfunding deals with minimum capital requirements, info / risk warning requirements, disclosure requirements, conflict of interest, conduct of business, know-your-customer,obligation to perform due diligence, limits of maximum investable amounts… Member states still have different approaches to regulation, but the industry is certainly maturing. For incumbent players with FSA authorization and seasoned financial services professionals, the increased regulation presents an opportunity to leverage expertise and experience, in effect erecting entry barriers to the market.