Survival of the fittest: Why clever collaboration with other parts of the market will change the game for platforms and investors

 
Jean Miller
Mugs depicting evolution of man are pict
From white label platforms to partnerships with P2P lenders, equity crowdfunding won't stay still (Source: Getty)

Demand in the crowdfunding sector has grown on a huge scale in recent years. Total transaction volumes increased by 85 times between 2012 and 2015, from £3.9m to £332m, according to Nesta. But the industry still has a long way to go.

How platforms have developed in recent years, in line with increasing demand and the different types of investors moving into the crowdfunding space, can be used to predict how they are likely to change to accommodate different investment strategies in the near future.

Early crowdfunding projects began with so-called donation platforms, enabling people to back startups with innovative ideas. These were not investments: backers were more likely to be incentivised with a prize or a prototype of the product, rather than a return on equity.

Read more: Five tips before you plunge into equity crowdfunding

Yet the popularity and the ability to interact with thousands of new investors meant many startups saw the opportunity equity crowdfunding offered. New businesses could now seek investment from the masses rather than debt-based funding from the banks.

This was a significant shift which saw the sector move from encouraging investment in business growth on a whim to facilitating business and investment opportunities with longer-term implications.

To begin with, most companies were ill-prepared, and platforms lacked adequate investment experience and expertise for this shift. But moving unlisted companies into the mainstream through a method which had already built an audience of (usually) younger people looking to back innovative ideas brought equity crowdfunding into the spotlight and encouraged a significant number of people to invest in equity.

Lamb to the slaughter

However, many of these investors held little or no previous experience in these types of investments, so we have seen criticism of some platforms for the values placed on some of their raisings. This poses an obvious threat to inexperienced investors, who may not know the key dangers to look for – threat of dilution of their holdings and the kind of rights they should try to ensure are attached to any shares that they buy, such as voting rights.

The high-growth (but also high-risk) opportunities these investments provide, as well as platforms’ online presence and ease of access, has since garnered more attention from a greater range of investors, with institutional investors and private equity firms also becoming increasingly interested in the market.

So where is the industry heading from here?

My platform InvestingZone recently merged with Acceleris, the corporate finance house, and like many in the industry, I’m expecting to see a number of similar deals. The kind of expertise a corporate finance house can offer means firms like us can place de-risked, realistically valued raisings on a publicly accessible platform.

This gives retail investors the opportunity to invest in the kinds of deals that were, until now, reserved solely for professional investors such as private equity and corporate finance houses. The public now have the opportunity to “follow the smart money”, with deals vetted and invested in by professional investors with many years’ experience before they hit the crowd.

For professional houses, it gives access to a wider audience of investors, but it also gives the investors confidence that the deals on offer are not hyped up by a kind of public mania, or because of a celebrity backer. It ensures that the deals have been subject to far greater due diligence and will be placed on offer to the public at valuations that professional investors are happy with.

Read more: An investor's refresher guide to equity crowdfunding

Crucially, public investors will also be investing on the same terms, with the same rights and benefits, as the professionals – something that has been dangerously lacking on some other platforms’ raisings.

Further afield

Ensuring even greater due diligence – and this is something retail investors are rightly increasingly demanding – will also see new market entrants using white label products to build their platform – i.e. a prefab platform that they then brand. This will free up resources for the in-house expertise needed to do high-quality due diligence and investor care.

An even greater trend will be a move towards existing platforms offering a white label product to companies looking to fundraise that have a strong customer base and want to offer the opportunity of becoming investors. Platforms could still assist with due diligence, valuations and marketing, but raising companies will have the option to brand and advertise their own investor platform.

We are also likely to see more peer-to-peer lending and equity crowdfunding platforms merge with each other as they look to expand their services, with many also looking to acquire competitors abroad in order to further expand into foreign markets. Similarly, existing firms which operate in the sector offline will look to take their services online, and acquiring an existing player is a quick way of entering this market.

These evolutions will raise standards in the sector and provide companies with more choice when looking for finance. Investors will equally have more choice in the number of companies they can invest in, and the means through which they are able to do so.

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