Equity crowdfunding platforms have a simple business model: they enable companies to raise funding from the crowd and then charge a fixed fee or a percentage to the firm or the investors or both. Some also charge a “carry” – a fee owed to the platform upon the successful sale of the company.
The largest UK platforms arguably have a head start over international competitors and will certainly want to establish themselves all over the world (and some have already started that push). But is that all the platforms are aiming for – world leadership within their niche?
I don’t think so. In order to explain why, I need to start with a digression on fintech startups more broadly.
Fintech in a nutshell
A crucial part of the fintech pitch has always been disintermediation: there are financial institutions that prevent money from flowing as easily as it could, that are slow to innovate, that aren’t customer-friendly, that have an outdated technological infrastructure which keeps on breaking every now and then, and that charge far too much for their services. Fintech startups want you to use them instead.
A crucial part of the fintech strategy is unbundling: trying to address only a fairly specific part of financial services that is broken, but addressing it really well. Specific areas addressed include personal loans, business loans, equity investment, money management, international money transfers, credit ratings, credit cards and direct debits.
We should view both disintermediation and unbundling with a tinge of scepticism. Fintech startups don’t want complete disintermediation – they want less intermediation, and they want the minimal, less opaque, less circuitous intermediator to be them. They want to be self-effacing enough to attract good PR but obviously not so self-effacing that they simply disappear from the picture altogether. And unbundling, focusing on a single financial services area, is a practical rather than an ideological decision. Startups have limited resources, so they need to focus on solving one problem really well. Then again, Google, Amazon, Facebook and Apple all once had fundamentally different business models, whereas they now more and more try to eat each other’s lunch.
Kicking away the ladder
In some ways, disintermediation and unbundling could be ladders that fintech startups kick away once they’re in a dominant enough position. How could equity crowdfunding platforms kick both away?
One way of increasing intermediation would be to start morphing into fund managers. Some platforms have enabled external fund managers to raise funds through them, and in some cases crowd investors do not have a say about where their money ends up.
Other platforms are setting up their own funds, again also not giving individual investors a say on where their money ends up. Both approaches add an extra layer between crowd investors and recipient companies, thus more intermediation (in a sense).
Read more: How crowdfunding is transforming investment
I don’t think this is a bad or sinister thing. Most people either don’t want to invest the time, or don’t have enough cash, to be able to have a properly diversified portfolio without using an external fund manager. And platforms currently have a purely transactional business model (they make money for each successful fundraising campaign), whereas setting up funds would allow them to charge constant management fees.
Second, to start bundling services, they could expand the range of asset classes they give access to. Some platforms already give access to public stocks, others to minibonds, others to property. They could try to bring all or most of these services together and effectively try to manage all of our spare cash – like high street banks, private banks and asset managers already aspire to do.
In an even more ambitious vein, but much more longer-term, they could start offering pensions or insurance. Pension funds and insurance companies have a lot of money sitting around that they either invest themselves or give to external managers, like venture capital funds, to invest on their behalf. The platforms could vie for that cash, thus coming into more direct competition with venture capital firms in the process.
It sounds far-fetched now, but may not in a decade.