By Sreeja Mamillapalli, Akhil Vajjhala and Aman Singla (NYU)
Introduction
On October 5th, two of the biggest crowdfunding platforms in the UK, Seedrs and Crowdcube, agreed to merge, creating one of the largest private equity market places in the world. When it comes to equity crowdfunding, the go-to platform for any European investor, young company, or growth stage business is either Crowdcube, Seedrs, or both. The two companies will be joined by the end of this year or early 2021, creating a merged company valued at approximately $140 million.
The merger will be structured as an acquisition by Crowdcube of all of the outstanding shares of Seedrs through a scheme of arrangement. Based on each company's most recent fundraising rounds, it was decided existing Crowdcube shareholders and option holders will own 60% of the combined company, while existing Seedrs shareholders and option holders will own the remaining 40%. Jeff Kelisky, Seedrs’ CEO, will become the CEO of the combined company, and Darren Westlake, Crowdcube’s CEO and co-founder, will become the executive chairman.
Overview of Crowdcube
Crowdcube was founded in 2011 by Darren Westlake and Luke Lang to help raise money for companies without a Financial Conduct Authority (FCA) license. Since its inception, Crowdcube has helped more than 1,120 startups to raise funds. As an investment crowdfunding platform, Crowdcube benefits both entrepreneurs and investors. Crowdcube enables entrepreneurs to raise funds with the added benefit of being backed by their community. For investors, the platform provides a way to hand-pick a stake in an innovative business they believe in that traditionally would have been restricted to professional investors.
To date, the platform has more than 900,000 members and a total of £1B invested. Crowcube has helped many notable businesses successfully raise funds such as BrewDog, Camden Town Brewery, Carwow, JustPark, eCar Club, Feedr, among others. The company is on an upward trend, as in the first half of 2020 alone, it closed 97 deals and generated £48.5m.
Overview of Seedrs
Seedrs was founded by Jeff Lynn and Carlos Silva in 2012. It essentially works as a “secondary market” for investors and firms to buy and sell shares. Investors will now be able to list their shares on the Secondary Market in a “direct listing” and sell to the Seedrs investor network, sell their shares via a “secondary campaign” to a community of customers and existing shareholders, or sell via a “private listing” and access the Seedrs network of institutional investors and funds.
Seedrs has itself raised a total of $40 million in funding from investors, including Augmentum Fintech and Schroders plc (formerly Woodford Investment Management). Since 2019, 250 startups have crowdfunded on Seedrs’ platform. 1,162 deals have closed over Seedrs, with approximately £977.3m in transactions. In the first half of 2020, Seedrs closed 95 deals and raised £49.7m. The platform’s most notable exits include Pod Point, Wealthify, and FreeAgent.
Synergies
Elevating crowdfunding to a whole new level through a greater network effect
By joining forces, thousands of ambitious fast-growth businesses and millions of investors will be able to benefit from the best expertise, services, and returns offered by Crowdcube and Seedrs’ investment platforms.
Significantly easier, more affordable, and valuable for ambitious businesses to raise growth finance, and investors will have an even greater selection of investment opportunities with richer investment tools.
Risks & Uncertainties
The most notable risk involves the market in which Seedrs and Crowdcube operate in. Total transaction value in 2020 through UK equity crowdfunding has fallen from $66.8m to $58.6m since 2019. CAGR from 2020 to 2025 is estimated to be 3.1%. The current circumstances present a further element of risk as well: COVID-19 caused early-stage VC investment (including equity crowdfunding) to decrease by 57%.
Crowdcube has had a few legal issues that could lead to issues down the road. In 2013, an entrepreneur launched his business on Crowdcube’s website, but his pitch was shortly pulled by the company with no explanation. Crowdcube blamed it on a “technical error” and is in the process of cooperating with the police. Experts are also critical of the platform’s business model. Investors become direct, individual shareholders in the companies which raise money through the site, and Crowdcube takes a 5% “success fee” once a pitch is fully funded. Crowdcube has prominent disclaimers regarding shareholder dilution of these companies that require crowdfunding, but there is worry over aggressive dilution, which could greatly diminish the value of the shares. Through the 2006 Companies Act, Crowdcube could be exposed to lawsuits if investors’ shares have been diluted unlawfully for an improper purpose.
“Today’s agreement is an incredibly exciting milestone that will benefit high growth businesses, their investors who believe in their vision and the wider entrepreneurial ecosystem that supports them,” Darren Westlake, Crowdcube’s founder and chief executive.