The UK’s crowdfunding sector appears to be entering a period of consolidation after the country’s two leading crowdfunding investment platforms struck a deal to join forces, with Crowdcube agreeing a deal to acquire rival Seedrs. Both businesses are still loss making and the merger will help them bring down costs as well as use the combined entity’s new scale to offer new services to investors and companies raising cash.
The two platforms were the first major players in the UK’s crowdfunding investment sector, pioneering the new investment model. Small investors can invest in shares or debt-based bonds issued by start-ups and growing SMEs to fund their development as an alternative to bank financing. Since 2011, over £2 billion has been invested in over 1500 companies through Crowdcube and Seedrs.
Scottish craft beer company Brewdog and fintech star Revolut, now worth over $5 billion, are two of the highest profile examples of successful crowdfunding campaigns that worked out well for both investors and the companies raising money.
There was, however, controversy around the diluted rights that came with Brewdog shares sold via its crowdfunding campaigns. This meant shareholders saw their stakes diluted during subsequent investment rounds. However, despite the contentious impact on the extent of the upside for crowdfunding investors, the company’s significant success means the investments have still done well.
Crowdcube and Seedrs announced that they believe their merger, which is subject to regulatory approval, will create “one of the world’s largest private equity marketplaces”.
The relatively new crowdfunding sector is still finding its feet after rising to prominence in the wake of the last financial crisis in 2008/09 when bank financing was hard to come by for small businesses, especially those lacking physical assets. Investors and savers were also chasing returns with interest rates on cash slashed and the stock market volatile.
Many analysts and market observers have always said the crowdfunding sector would face its first real test when it had to survive an economic downturn such as that now catalysed by the Covid-19 pandemic. And with Crowdcube and Seedrs both still yet to achieve profitability, the tougher market environment the sector is likely to face over coming months may have been a major motivation to agreeing a merger. Seedrs has said the number of new crowdfunding campaigns going live and investor interest have both slowed over the pandemic.
Crowdcube registered a £2.6 million loss in 2019 and has total accumulated losses of £23.1 million. The last year for which Seedr’s accounts are publicly available is 2018, when the company recorded a pre-tax loss of £4.3 million, taking accumulated losses to £15.2 million.
Both Crowdcube and Seedrs have relatively modest valuations in respect to their turnovers, £84 million and £56 million respectively at their most recent investment raises. That reflects the fact that the investment model is still some way from definitively demonstrating its long term viability.
The merger will be structured as Crowdcube acquiring Seedrs, with the former acquiring all of the latter’s outstanding share capital through a ‘scheme of arrangement’. The model is often used in both takeovers and debt restructurings. Crowdcube’s shareholders will own a combined 60% of the proposed new joint entity, with Seedrs investors receiving 40%.
Crowdcube chief executive Darren Westlake commented:
“Equity crowdfunding has redefined how many ambitious businesses raise investment and engage with their customers.”
With Seedrs counterpart Jeff Kelinsky adding:
“We believe that you need to be a player of greater scale to serve companies and the investors who support them.”
Mr Kelisky will take on the role of chief executive of the new combined company with Mr Westlake becoming its executive chairman.
The deal has not met with universal approval, with Rob Murray Brown, a longstanding critic of the crowdfunding sector stating that from his point of view the result of the merger would be to merely extend the life support period. He believes the sector’s fundamentals still mean that, ultimately, even the combined business will fail to survive, stating:
“They are in a sense a reflection of so many of the zombies they help to fund.”
Other industry insiders are said to have expressed the same concern, with the larger company likely to help reduce losses but that scale would not resolve underlying problems with the business model, with the average quality of the companies that turn to crowdfunding highlighted as a concern.
On a more positive note, David Brear, chief executive of financial technology consultancy 11:FS commenting:
“My hope would be that this merger could lead to a really interesting secondary market for pre-[flotation] companies.”
A secondary market involves investors in crowdfunded equity raises being able to sell-on their shares in companies on a liquid exchange before the company is either acquired, goes public or is able to offer to buy back its own shares.
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