Equity Crowdfunding Part 1: Consolidation always follows the Cambrian Explosion phase


Today, Part 1, describes the consolidation phase of this market.

Part 2 describes the innovation at scale phase when traditional equity crowdfunding “goes crypto”.

Part 3 steps back into the past (which will always be with us) of artisanal equity funding.

The final Part 4 describes the rebundling phase driven by APIs and ecosystems.

The world is in crisis on many levels – economic, political, health, climate. Recovery from this crisis will require innovation and innovation requires risk capital. That is why we are publishing our next 4-parter (each post is a 3 minute read, one week apart) on the subject of equity crowdfunding, which shook up the capital markets by allowing the general public to buy shares in early-stage companies to help them raise money.

This is a super simple idea and the MVP (Minimum Viable Product) for an equity crowdfunding site can be created quickly for very small amounts capital and can have a huge impact. So it is no surprise that we saw a cambrian explosion of equity crowdfunding sites.  Almost every country has multiple sites. Mostly they were founded in the wake of the 2008 Global Financial Crisis (GFC).

The proliferation of Equity Crowdfunding site is a huge problem for investors. Which site do you pay attention to?  It gets worse when you look at it from the entrepreneur’s point of view and see Equity as only one form of Crowdfunding. An upstart founder can also use:

  • Debt crowdfunding aka Direct Lending. This just makes it a bit easier to fund your venture based on your personal assets – a tactic only for the brave entrepreneur!
  • Rewards crowdfunding.  This already has a global leader =  Kickstarter, possibly because  (unlike equity), rewards crowdfunding, does not need to deal with a patchwork of country by country regulations. Rewards crowdfunding is good for the entrepreneur but does nothing for investors,

Within equity crowdfunding, I would divide the market into:

  • Funding for “butchers, bakers and candlestick makers”. This is main street equity. Investing in the neighbourhood restaurant started by a trusted friend may appeal for some not totally financial reasons.
  • Funding for the next global unicorn. Maybe you will buy shares at the earliest stage possible in the next Revolut and make a fortune. Revolut raised in £3,927,802 from 4,260 investors in August 2017 on Seedrs after a  £1m crowdfunding campaign in 2015 was oversubscribed by over 10,000 would-be-investors who pledged to invest £17m, all of whom were Revolut users. Or more likely you will buy equity in one of the 9/10 ventures that fail and you lose all your capital. This is the highest risk/reward game in the capital markets.

Equity crowdfunding consolidation is already happening. In the UK, two market leaders,  Seedrs and Crowdcube agreed to merge but the deal was killed by the regulators but then Seedrs was acquired by a U.S. firm called Republic. Revolut, possibly the big UK Fintech success story did a raise on Seedrs (see our analysis of Revolut here). If the top Fintech success story was launched on the top equity crowdfunding site, the UK tech scene will be well and truly on the map and the Republic acquisition will look smart.

Consolidation is needed because these are two sided networks and the decision process should be simple for both parties. Both entrepreneurs and investors should have an easy decision on which platform to use.

It is easy to get excited at the cambrian explosion phase, when Tigger excitedly proclaims that we have hundreds of equity crowdfunding sites that will surely  change the world. Consolidation looks boring in contrast – lots of M&A, accounting and layoffs. One assumes that innovation and consolidation don’t go together.

Next week’s Equity Crowdfunding Part 2 will look at innovation and consolidation happening at the same time.

Bernard Lunn is Editor and CEO of Daily Fintech and author of The Blockchain Economy

Daily Fintech’s original insight is made available to you for US$143 a year (which equates to $2.75 per week). $2.75 buys you a coffee (maybe), or the cost of a week’s subscription to the global Fintech blog – caffeine for the mind that could be worth $ millions.

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