The expansion of equity crowdfunding platforms across Europe and the US requires constant tracking, unsurprising as the industry raised over $30 billion worldwide last year, with the sector growing 84% from 2014 in the UK alone. As a result, the manner in which equity crowdfunding works alongside traditional modes of investment has had to adapt. Today, Equitise examines the role of VCs as they continue to work alongside the equity crowdfunding industry in the UK.
ECF “crowding out” other modes of investment
A recent study published by the University of St Andrews and the University of Stirling found that equity crowdfunding is “crowding out” the likes of Venture Capital firms, banks and angel investors in the UK. It suggests that the equity crowdfunding industry now represents a £146 million economy, which is largely attributes to the enormous success of Crowdcube (who have just opened a licensed office in Spain), though this would serve to under-appreciate the enormous raises of Seedrs and SyndicateRoom.
The document classifies the UK equity crowdfunding market as the fastest-growing one worldwide, a reflection of the fact that 69% of British entrepreneurs surveyed singled out its success as owing to the lack of alternative available. These participants found that equity crowdfunding platforms “offered relatively favourable valuations of their companies, in contrast to business angels, who tend to be tougher on price.”
“While some organisations have labeled crowdfunding ‘alternative’ finance, our work suggests that ‘disruptive’ finance would be a more appropriate term.” Ross Brown of the Centre for Responsible Banking & Finance at the University of St Andrews
In a recent post by industry watchdog Crowdfund Insider, Ron Miller posited whether equity crowdfunding and Venture Capital were able to coexist. It suggests that the initial misgivings held by some venture capital firms at the inception of the equity crowdfunding industry must be set aside given its nascent success worldwide, which is tantamount to proof that the broad shareholder base is a benefit rather than a hindrance. Miller concludes that the democratic nature of crowdfunding largely benefits VCs, as they can tap into the feedback offered by retail investors and view which companies are gaining traction.
As 75% of startups funded by venture capital fail, this proves timely for the industry, and consolidation between the two sectors can be mutually beneficial. The level of feedback offered and the validation that can be weighed by VC firms is valuable – hence why companies that have crowdfunded by Kickstarter and Indiegogo have proceeded to be funded by venture capital firms. The combination of the VC skill set and industry expertise combined with the array of ambitious companies accessible from an equity crowdfunding platform is an exciting one.
This marriage of industries in the interest of mutual benefits has been seen in the UK, states Laith Khalaf, senior analyst at Hargreaves Lansdown. Mr Khalaf claimed that High quality global journalism requires investment. “There is overlap in the kind of companies sought out by venture capital and crowdfunders, while at the same time there is a limited amount of retail money which will be invested in this sort of company, which lends weight to the idea that there may be some consolidation.”
Equity crowdfunding should no longer be viewed as the “alternative” industry though – figures released by Massolution state the industry in 2015 represented $34bn in comparison to the $30bn venture capital industry. As the World Bank states that equity crowdfunding industry could approach a $90bn by 2020, partnerships like that between VC firms and crowdfunding platforms will become more frequent and necessary.