November 8, 2019
Gilberto Arredondo, Strategy & Investment
Crowdfunding has certainly brought fintech closer to its customers, as the industry experiences a daily buzz related to Unicorns, digital banking, a surge in lending, and the success stories from crowdfunding capital raises.
After 2008, trust in banks wained. The global collapse sent the world into a depression, not only financially, but psychologically, and the recovery has led to a new breed of financial service provider driven by the alternatives born of the collapse of trust. Banks, once considered the cornerstones of global finance, failed us, and people in growing numbers are actively searching for alternatives.
Fintech has grown as a sector, and although initially in total opposition to the banks, today, and more as time has passed, the relationship has become more often than not, symbiotic, leading to collaboration, partnerships and increasingly, M&A combinations. This atmosphere of collaboration across technology and business models has made it’s way to customer acquisition and ownership, but more on that later.
The key is how to monetise, and the industry has spent a lot of time on this, focused on business models, transactional revenues, and scale. Elusive scale. Revenues remain so difficult to attain that both revenue and profit are rarely even discussed in board meetings and market updates; instead talking about customers, scale and moving to monetisation at some point in the future. Revenues? Nothing to see here, but we don’t measure success with revenue. An amazing state of the industry built on revenues, profit and growth.
Instead, today, fintech is a technology proposition, battling for relevance, customers, traction, and future decisions to determine how to achieve investor returns.
In our view, the industry is moving the right direction, but we’d like to approach fintech from another angle, one where value is created for the companies, and investors. Crowdfunding solutions are providing fast-moving companies access to capital from a diversified source, eager to be involved based on the press pouring daily out of the industry. Massive rounds of funding are being followed by large crowdfunding rounds of over 10M (of all currencies) and in the meantime, adding to it’s base of users, as these investors, their friends and family, are the early adopters pushing the product deeper into the market.
In the crowdfunding model, investors evolve into users with influence, and in return, the companies leverage those investors as sources of feedback, valuable information and from which to pull ideas for the future product roadmap. The model enhances communication by providing a direct channel of dialogue to a vested customer base, creating an environment for developing better products, ultimately driving growth, and ideally, revenues. This change is taking place across many industries, not just finance. Businesses have learned that a product-first approach, while forging strong customer relationships through new business models and investment channels, is creating a modern dynamic with their market for their brand: owners, customers, companies, and success… democratised.
To set the scene for you, let’s look at the Revolut example. In 2016, a little known pre-paid debit card startup that allows users to exchange currencies and transfer money internationally with the interbank rate, rather than the extra fees that banks slap on users, based out of the UK, asked people to invest into the fintech startup on crowdfunding platform Crowdcube, and those who did, realised returns of around 19x in two years (by Aug.2018). As of today, that number is more like 27x (extrapolating unofficially). That’s right, investors realised a 2,700 per cent return on their original stake in the company in just two years. Investors have been offered the option to either sell their shares back to Revolut or retain them. Wouldn’t it be nice if that happened all the time? For fintech companies, valuations remain a mystery, but multiples regarding valuation of this type still remain strong, with 5–6x EBITDA being the common starting point, and 10–15x often turning up in industry M&A negotiations. Today, Revolut is valued at over $1.7B, this week launched in Singapore, with plans to expand into Australia, Japan, Canada, and the USA.
So what are the crowdfunding model options? Traditionally, there have been four, but today, there are five:
1. Donation Based Crowdfunding
The typical example of this type of crowdfunding is the fundraising for humanitarian purposes. People donate their money for a cause, an idea or simply in order to help the organisation making the campaign. In fact, the people who donate don’t expect any type of reward from their actions, they simply hope that the amount they have invested can really help make a difference.
2. Rewards Based Crowdfunding
We can consider the Rewards Based Crowdfunding as the “upgrade” to donation crowdfunding. In fact, very early stage companies make these kind of crowdfunding campaigns in order to finance the production of their future product. By financing the project, the investor will get the product or a discount when the product will be ready for the market. In order to make people invest more money, there are different discount levels that are offered, usually increasing with the amount invested. However, the perception of this kind of crowdfunding is similar to the donation type because you don’t even know if the campaign will reach the target and the production will effectively start. One of the most famous platforms for rewards-based crowdfunding is Indiegogo, in which you can find innovative and high-tech products that are going to be produced with the funds of their campaigns.
3. Debt Based Crowdfunding
Think of a bond. A state offers these types of financial instruments in exchange for liquidity. Of course there will be an interest rate that defines the earnings that the investor will get at the end of a fixed period. It works similarly for debt based Crowdfunding. In fact, these campaigns are particularly popular among entrepreneurs who don’t want to give up equity in their start-up companies immediately and/or do not have access to more traditional types of loan facilities. These are also growing in popularity as a way for real estate developer to fund a particular real estate project or projects.
4. Equity Based Crowdfunding
In an equity-based crowdfunding campaign, a person contributing money can expect to receive some ownership of the company that is raising the funds. From another perspective, the company which is running the campaign is selling off a piece of its ownership (e.g., shares, membership interest, etc.) to each of the crowd members who contributed with money. Usually the crowd is interested in participating in this kind of crowdfunding because the equity, that they are buying can address them dividend or can be sold in the future at a higher value. Equity based crowdfunding campaigns are being used more and more by entrepreneurs and start-ups seeking an alternative to traditional venture capital and angel investors when looking for a capital infusion to take their business to the next level.
5. [NEW] The Introduction of Blockchain Equity Crowdfunding
Equity crowdfunding is the most interesting type of crowdfunding for investors who are seeking for great profits. In the the blockchain based equity crowdfunding model, the equities are recorded on a blockchain in order to make use of the advantages that blockchain technology brings. It is immutable too hacks such as DDoSS attacks, which is a problem that even big companies like VISA and Playstation still struggle with. It also allows for a more liquid tradeoff which makes it more accessible. By combining the blockchain technology and the equity crowdfunding, each project will have more visibility and engagement from the investor side, because they are interested in the growing of the company.
Clearly equity crowdfunding is experiencing rapid growth, here are some very recent examples:
● Last month, Zazu, a Lusaka-based fintech company announced that it had raised USD 1.4M in funding in its second crowdfunding campaign, it has already announced a third coming soon.
● In August, the UK fintech Curve, an Over-The-Top banking platform that consolidates multiple cards and accounts into one smart card and app to simplify and unify how people spend, send see and save their money, announced it’s first crowdfunding campaign (also on Crowdcube). Curve offered eligible customers a chance to invest in “one of Europe’s hottest fintech start-ups”, enabling them to invest from as little as £10 to own part of the business and gain access to some exclusive shareholder rewards. Curve raised £6m in a fast paced crowdfunding campaign that saw £4m raised in just 42 minutes. Forty two. Minutes. The first £1M took five minutes and the total number of participants ended at just over 9,500 people.
● …and so as not to leave out our friends in the USA, in September, Arival Bank raised $2.3M in a pre-Series A, equity crowdfunding campaign. The Singapore-based fintech bank for businesses and entrepreneurs soared past its fundraising target of $864,500, and now boasts a pre-money valuation of more than $14.8 million. The campaign marks the first time a digital bank has conducted an equity crowdfunding raise in the U.S. Seedinvest, an SEC-licensed broker dealer platform based in New York, spearheaded the fundraising with Crowdcube (again!) in the role of joint partner.
As I said above, fintech is strong.
In 2019, and into 2020, there are a great many segments flourishing, particularly Banking, Financial Services, Insurance, Lending and Equity Investment. The digitisation of lending and investing is moving forward at a speed the market has not seen in other segments. In recent years, lending and investing has spread globally as user experiences and business models are re-imagined. Much of what is to come in the next few years will certainly be about consolidation, at all times enhanced user experience, and crucially important, marketing innovation.
The battle for attention is waging and an ethical, yet aggressive solution is what may differentiate a brand. Swearing at banks, the 2016–2018 trend, has been played out, and, funny enough, those same companies who employed the tactic are now partnering with the traditional banks. Let’s not forget, the same banks are pouring hundreds of millions into fintech M&A, into the very same companies who swore at them up and down… it’s time for the industry to do some serious thinking about what’s next for the future of its messaging.
For those watching closely, we know that today’s founder/CEO is frustrated by venture capital, who many say do very little venture investing, but instead focus on the lowest possible risk investments working in tandem with only their close partners. Founders are looking at alternatives and crowdfunding has become a proven channel for alternative funding rounds for as high as $15M, although regulatory hurdles keep these rounds to lower amounts (typically less than ~$8M) in many cases for smaller organisations. The channel is driven by great user experiences, promoting ease of use for the companies and investors who expect easy-to-use mobile experiences, and providing holistic, integrated digital lending capabilities, helping to address the market’s changing preferences.
One advantage of the past 10 years is that the industry is making strides to overcome the fear of mobile, with user uptake of mobile financial services soaring in global markets, including in the USA where, for example, Bank of America’s digital channel now accounts for 26% of total sales, with mobile representing over half of these digital sales. And as another good sign for the lending sector, despite this growth, BOAs strategy to increase these numbers is centred around focused energy on even more advanced areas of digital account opening, like lending.
In an example of traditional cornerstone investors moving to an online and mobile financial services focus, Goldman Sachs CEO, David Solomon, recently said, “I think we’re in the early stages of building a digital platform for consumers that gives them more information, more tools are their disposal. Over the last three years we’ve built a digital bank with $55 billion in digital deposits, with $5 billion of loans; 4 to 5 million customers; a brand-new credit card platform and have launched a card with Apple. I feel like that’s pretty good progress over a short period of time.”
Traditionally, only professional investors could get involved in equity financing rounds, and it’s clearly crowdfunding which has forged the route around this obstacle. In its simplest form, Crowdfunding connects startups with people in the market who have funds and believe in the plans of these businesses, and this simple model is expected to grow the industry to over USD 300 billion by 2025.
In the past, traditional investing could lead to a long, tiring, and often rewardless exercise. We believe Crowdfunding can change this, giving companies the chance to engage with investors when their ideas might otherwise never have come across the desk of a traditional investor. It also allows founders and their teams to validate their ideas before entering the market, while providing the advantage of converting investors to loyal customers and brand ambassadors by offering them incentives for their early show of support.
Equity crowdfunding is creating a new class of investor. There are genuine risks that many people who become involved do not have adequate investor experience to understand all of the implications of their investments, or, as a risk to the companies themselves, to be a positive influence on the future of the business. This places a new responsibility on those backing projects through crowdfunding platforms to educate themselves, through crowdsourced Due Diligence and progressive community conversation. Coupled with this level of necessary self-governing responsibility, crowdfunding has the real potential to become a reliable tool for venture capitalists to achieve a lasting ROI long into the future of fintech.