The debate on equity crowdfunding has been growing for some years as the industry has been getting traction on a global scale among startuppers, entrepreneurs, investors, universities, and decision makers.
Beauhurst, the leading research firm in the equity investment sector, has been painting the picture accordingly.
Oliver* met up with Pedro Madeira, Head of Research of the London-based company, to wrap 2016 up and have a go in imagining how 2017 will look like with a focus on the United Kingdom in the aftermath of Brexit.
Oliver*: Hi Pedro, first thank you for joining us. If you have to sum up 2016 in 5 facts, which ones you might choose for the equity crowdfunding industry in the UK?
Pedro: Hi Oliver*, thank you for the invitation. My TL;DR for 2016, 7 instead of 5 facts:
- The number of successful equity crowdfunding campaigns saw a slump in H2 for the first time ever (the first successful ones having taken place back in H1 2011).
- The FCA carried out a post-implementation review of its crowdfunding rules. Bottom line: the FCA thinks the industry is still too opaque.
- There have been a few failures (including a high-profile one) and a handful of exits (including one for an undisclosed consideration just a few weeks ago), but given how long equity-backed companies typically take to mature it is still too early to have a good picture of crowdfunding returns.
- SyndicateRoom created its own in-house fund – a sign of things to come.
- Two platforms, Growthdeck and Squareknot, merged – a sign of consolidation in the industry.
- Seedrs published the first extensive public portfolio evaluation by a platform.
- Crowdcube announced it is to create a secondary market for shares.
O*: Media outlets pointed out that the global wave of populism turned the world upside down in 2016. From your perspective how Brexit is going to affect the sector in the UK?
P: We won’t have a full picture of how H2 2016 fared for about another month or so (watch out for Beauhurst’s full-year 2016 report). But there was a downturn in Q3 in terms of number of crowdfunded deals.
Uncertainty prevents businesses from planning.
When you get bad news you can try to minimize the impact. When you just don’t know what is going to happen, you have to expend energies on contingency planning rather than on growth. You need to run in order to stay still.
Businesses don’t even know what May wants to achieve in her Brexit negotiations, let alone what deal we’ll end up eventually getting. I expect investment volatility to continue.
To mention one specific area of concern, many retail/FMCG/high-street businesses raise funding via crowdfunding.
Growing inflation, arguably partly due to Brexit uncertainty, will eventually leave consumers with smaller discretionary spending power, which is bad news for those businesses.
O*: Looking ahead to 2017, what future do you foresee for equity crowdfunding in the UK?
- Consolidation will continue.
- Platforms will continue morphing into fund managers, as I had argued elsewhere a while ago.
- Platforms will intensify their efforts to appear respectable and “grown-up”, collaborating closely with the FCA and doing more to weed out the duds before they reach the crowd.
O*: Which are the regions where equity crowdfunding could play a pivotal role in fostering the economic growth in 2017?
P: Crowdfunding has traditionally gravitated around London and mostly benefitted B2C businesses.
It is becoming clear that the regions that voted most in favour of Brexit will perhaps be the most affected, as foreign investors and corporates will pressurize the government into shielding them from uncertainty. Jobs will inevitably be lost in this game of chicken. In a country as entrepreneurial as the UK, my expectation is that new businesses outside London will be forged following those job losses.
In uncertain times, B2B businesses can also become more appealing, as their revenue tends to be stabler.
I therefore expect crowdfunding to refocus and, in so doing, become a more balanced asset class.