UK: Equity Crowdfunding in Chiaroscuro

What has been the impact of Covid-19 on the investment market in the UK so far? Overall, the picture is one in contraction, a study reveals.

However, when matched against specific segments, not all businesses have been impacted equally. Indeed, data show that crowdfunded companies are more likely to be negatively impacted by Covid-19 than companies that have received VC backing.

Nevertheless, despite crowdfunding has confirmed to cater consumers mostly via ventures in sectors such as food & drinks and clothing, that is, the most impacted by COVID-19, data from the first six months of 2020 have confirmed an increase of both the number of deals and amount raised compared to the same period of 2019. 

Source: The State of UK Crowdfunding in 2020 (Beauhurst)

At the end of the day, though, it is still unclear how the market will evolve given the uncertainties brought to the table by the combination of Brexit negotiations and the economic implications of the pandemic.

Experts assume that crowdfunding activity will shrink further than that of institutional funds as the UK economy descends into a recession and the general public has less disposable income.

On top of this, the success rate of crowdfunded projects doesn’t play a hook role towards prospect investors as just 3% have reached an IPO or successful acquisition compared to 12% of venture-backed companies since 2011.

One of the reasons could rely on entrepreneurs. They prefer this form of entrepreneurial finance to maintain greater control on the direction of the company, especially if the investor relations are managed through a nominee approach, a thing which prevents the crowd to be directly involved. 

On the other hand, in so doing they preclude themselves to access expert guidance as well as wider networks provided by institutional investors like VCs, often a killer application in terms of business development. 

The combination of these two aspects could help explain why many crowdfunded projects stagnate in their stage of growth which often sits in between the launch of a new product and one that is still being developed. 

Therefore, the industry, which is currently led by Seedrs and Crowdcube and sees London as the main hub of the Country, has to find new ways to attract new investors and contrast the challenging times ahead. So far, one of the tactics deployed has been secondary markets, as previously reported here and here. Will it suffice?

Find out more about the research by Beauhurst here.