Who should investors back in the £5.3bn equity investment industry?

For investors who want to own a share in the alternative finance sector, there has been no end of opportunity this year as equity crowdfunding platforms line up to raise finance.

Crowdcube, Crowd for Angels and Growthdeck are all running campaigns and Seedrs, SyndicateRoom and Invesdor have recently closed funding rounds on their own platforms.

Crowdcube – 7 days left to invest

Crowd for Angels – 19 days left to invest

Growthdeck – 8 days left to invest

The Crowdcube campaign has a target of £5m for 9.38 per cent equity, the platform set its pre-money valuation at £65m and at the time of writing has already funded over £6.8m, more than 136 per cent of its target raise.

It’s had plenty of initial support for its offer, investors rushed in funding £6m in just 24 hours. However, momentum has stalled as the company has exhausted its Enterprise Investment Scheme tax relief, investors subscribing now will not benefit from any tax relief on their investment.

The platform launched in 2011 and claims to have raised £160m for businesses, it says it has 285,000 registered members.

Crowdcube is raising funds to develop a secondary market and grow its product offerings. It recently expanded its Financial Conduct Authority regulatory permissions and now wants to facilitate initial public offerings (IPOs) to retail and institutional investors, manage a nominee, manage funds, and provide advice on investments.

The Crowd for Angels raise has a minimum target £196,000 for 6.67 per cent or £700,000 for 20.34 per cent. Its pre-money valuation is just over £2.7m and it is raising capital to increase its marketing efforts and expand membership. It has currently funded over half its minimum target.

Crowd for Angels provides both equity and debt-based crowdfunding products. The platform rolled out of beta in December 2014 and its directors and seed investors have financed the company through its startup stage. It is now inviting other investors to come on board at what it believes is a favourable valuation in relation to other platform offerings in the marketplace.

To date, the platform has listed 27 pitches and helped companies raise £1.1m.

It receives over 6,100 visitors per month to its platform and despite being way behind the industry market leaders; the platform is consistently accomplishing the third position in web traffic for equity crowdfunding platforms in the UK, according to Alexa.com.

Source: Alexa 8th Aug 2016

Growthdeck launched in January 2016 as a joint venture between Radius Equity and Lexicon Marketing, a brand and digital consultancy that works with financial services firms. It has a target raise of £1.2m for 25 per cent equity and has currently funded over £995,000 from 50 investors.

The newly established crowdfunding platform has attributed a pre-money valuation of £3.6m to the company.

Shortly after its launch, Growthdeck announced a merger with Glasgow based online equity marketplace Squareknot. Clearly, this company is not content with just organic growth and has an aggressive expansion policy.

An interesting feature of the Growthdeck proposition is the ‘carry’ investors will get. For each business the platform funds, Growthdeck will be allocated a carry (the right to acquire a stake in the investee company, typically three-five per cent). Growthdeck shareholders will be offered these shares, at the same nominal cost, in proportion to their shareholdings.

Growthdeck is targeted primarily at sophisticated and high-net-worth investors. But investors who can demonstrate a sufficient understanding of the risks in equity investing can register as a restricted retail investor. It closes its fundraising on the 19th of August 2016.

The platform says it is aiming to raise funds for some 30 companies over the next three years and has a shorter exit strategy than Crowdcube, it is looking at building up its platform for a trade sale within the next three to five years.

The case for platform investments:

According to a February 2016 report from Nesta, equity-based crowdfunding in the UK has grown from £28m in 2013 to over £245m in 2015 and was the second fastest growing sector within the UK alternative finance industry.

It says the UK Seed and Venture stage equity investment market was reported to be worth £2.4bn with the total equity investment in the UK for private companies estimated to be worth £5.3bn.

There is no doubt there is massive growth potential for this emerging industry sector. It is Inevitable we will see new platforms launched and further mergers and acquisition activity from both domestic players and global participants in alternative finance.

Source: AltFi Data  - Tracked UK equity crowdfunding volumes by quarter

The major risks that could derail the sector’s growth projection come in the form of a slowdown in the wider economic environment, the regulatory situation, and new technology.

The alternative finance sector is still developing and regulation and legislation is playing catch-up. While there is unlikely to be any wholesale legislative changes, the evolving regulation will impact alternative finance providers in some way. Whether this materializes as a risk or further opportunity, investors should be aware that industry changes are likely to come.

Technology risk can come in the form of cheaper ‘white label’ solutions or blockchain technology.

Developers are rolling out solutions which enable any company to add a crowdfunding platform to their own websites. While this is still a costly and complex solution for start-ups and small companies, larger companies, with a large existing stakeholder base might opt for this solution and cut the platforms out altogether.

Blockchain is still an emerging technology but it has the potential to disrupt not just the alternative finance sector but all finance providers. Industry commentators forecast it will revolutionise processes in the financial services industry and the way we do our banking and investing will change beyond recognition within a few years.

The technology deployed is known as a distributed database, which runs on many computers and needs no central authority. This open-source digital ledger has far-reaching implications for the sector, at the minimum, it will negate due diligence of both the investee and investor.

Are we comparing apples and oranges?

If we are weighing up the investor opportunity, is it fair to contrast the established market leader with the relative newcomers in the sector?

Since its launch, Crowdcube has created and dominated the equity investment crowdfunding sector, with a market share of more than 50 per cent. 

Source: AltFi Data - Q1 2016 Equity crowdfunding market share by £’s deployed

Crowdcube might be the biggest and the best but being number one in any sector is a highly prized goal but also a costly business. Industry leaders have the burden of continuous investment in marketing and public relations to maintain their market position.

Crowdcube does not expect to earn profits anytime soon and has estimated its breakeven point at the end of the calendar year 2018. Its substantial monthly cash burn is £740,000 in 2017 (£415,000 is wages and salaries for it 80 employees and £325,000 is operating costs, which includes marketing). Investors are funding £3.65m for working capital to sustain the platforms existing operations.

The platform’s strategy is for long-term growth. When a sector is growing and there is a stampede for market share, the industry looks only at growth rates and ignores unit economics. However, investors should keep an eye on unit economics, a company with strong growth is great but companies eventually need to make money and investors can't just keep providing more capital.

Crowdcube has so far raised over £12.5m in four funding rounds and its backers include Balderton Capital, Numis Securities, Silicon Valley investor Tim Draper and London-based venture capital firm Draper Esprit.

If you are thinking of investing in the sector it would be hard to ignore the market leader, it’s probably the most likely of all the platforms to be first for an IPO, but more agile, dynamic players probably have more momentum for shorter-term investor returns.

Growthdeck has a really interesting proposition however, the invitation carries a minimum investment amount of £1,000 which puts it out of the range of most retail investors who need to build a balanced portfolio and certainly out of the reach of my meager investment budget.

Crowd for Angels is running with a lean and efficient operational structure. Investors are funding a marketing campaign which means that the capital will directly impact the company’s bottom line. Crowd for Angels estimates its current return on marketing spend is 58 per cent. It forecasts a breakeven point of June 2017.

In addition, the platform is currently offering 100 free shares in Crowd for Angels for anyone who invests £200 (a two-for-one) in any of its pitches!

If you want to add a piece of the alternative finance industry to your portfolio but don’t like any of the current offerings from the platforms, rest assured, its highly likely that we will see other platforms raising capital this year.