September 27, 2016

Here’s why fintechs are turning to equity crowdfunding for investment

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FinTech

Equity crowdfunding refers to when investors, including the general public, invest in an unlisted company in exchange for shares.

It’s usually facilitated through a digital platform. Recently, we’ve seen a number of fintechs leverage equity crowdfunding platforms for funding rounds — and investor interest is growing. UK fintechs GoHenryMondo, and Tandem all raised over £1 million ($1.3 million) using equity crowdfunding earlier this year. Revolut received £13 million ($17 million) in pledges this week before its round even opened, while Crowdcube attracted an astounding £39 million ($52 million) on its preregistration site.

So far, it’s mostly UK fintechs that have used equity crowdfunding, but recent changes in US law mean it could be about to take off there as well. Here’s why fintechs are turning to equity crowdfunding:

  • Brand awareness and customer acquisition. Fintechs’ crowdfunding rounds have attracted significant attention in the media, raising awareness of their products. Most have also required potential investors to sign up for their products in order to invest — a practice that could result in a significant increase in active customers.
  • Differentiation. For many fintechs, it’s becoming difficult to stand out in an increasingly crowded market — this is particularly true of UK digital-only banks. By allowing customers to become shareholders, like Mondo and Tandem did, firms could drive customer engagement and loyalty to their products.
  • More control. Equity crowdfunding can result in startups getting higher valuations than they would with more traditional fundraising methods. That’s because direct investors seem willing to accept lower equity stakes for the same investment than VCs or Angels, according to research by Beauhurst. This means that these startups can retain more shares, and therefore more control.
  • Diversity of investment sources. Crowdfunding offers an alternative to traditional sources of funding, which could be particularly important if economic turbulence negatively affects VCs’ willingness to invest. Post-Brexit, we may see even more UK fintechs turning to crowdfunding.
  • Increased accessibility. Investing via equity crowdfunding in the US had been restricted to accredited investors until May. But restrictions have now been lifted thanks to Title III of the JOBS Act. This vastly increases the number of investors that fintechs raising via equity crowdfunding can target. As a result, we may see more US fintechs start to leverage equity crowdfunding.

So far only a small portion of fintechs have turned to crowdfunding to raise money, and most have done so as part of a wider round that also included VC investment. In the UK, this is because firms are restricted to raising €5 million ($5.5 million) or less via crowdfunding unless they issue a full prospectus. But growing investor interest in these rounds could mean more fintechs decide to do just that.

If so, equity crowdfunding could replace the likes of VCs and Angel investors, especially in early stage rounds. As a point of context, the median US venture-funded seed round is around $1 million, while the median Series A round is $5 million — both well within scope of crowdfunding rounds.

We’ve entered the most profound era of change for financial services companies since the 1970s brought us index mutual funds, discount brokers and ATMs.

No firm is immune from the coming disruption and every company must have a strategy to harness the powerful advantages of the new fintech revolution.

The battle already underway will create surprising winners and stunned losers among some of the most powerful names in the financial world: The most contentious conflicts (and partnerships) will be between startups that are completely reengineering decades-old practices, traditional power players who are furiously trying to adapt with their own innovations, and total disruption of established technology & processes:

  • Traditional Retail Banks vs. Online-Only Banks: Traditional retail banks provide a valuable service, but online-only banks can offer many of the same services with higher rates and lower fees
  • Traditional Lenders vs. Peer-to-Peer Marketplaces: P2P lending marketplaces are growing much faster than traditional lenders—only time will tell if the banks strategy of creating their own small loan networks will be successful
  • Traditional Asset Managers vs. Robo-Advisors: Robo-advisors like Betterment offer lower fees, lower minimums and solid returns to investors, but the much larger traditional asset managers are creating their own robo-products while providing the kind of handholding that high net worth clients are willing to pay handsomely for.

As you can see, this very fluid environment is creating winners and losers before your eyes…and it’s also creating the potential for new cost savings or growth opportunities for both you and your company.

 

 

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Karensita

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