Looking Three Years Into the Future of Investment Crowdfunding

The U.K. is at least three to four years ahead of the U.S. when it comes to equity crowdfunding.

So from time to time, we look across the pond to get an idea of what the U.S. scene may soon become. (U.S. citizens can’t invest in U.K. deals – for now.)

In the U.K., equity crowdfunding had a mild start. But there was a small dedicated group of investors, and some interesting startups and small businesses were funded.

Over the last two years, things have really started taking off.

Now the U.K. equity crowdfunding scene is booming. The top investment portal there, Crowdcube, just announced $23 million was invested through its platform in Q1 2017. Crowdcube has a market share just around 5%.

It’s a broad market with tons of peer to peer lending, real estate, business debt offerings and equity (shares), of course.

The new market has actually surpassed U.K. private equity and venture capital (VC) combined in number of deals. This chart tells the story, showing the number of early-stage deals over time:

It’s a fascinating chart, courtesy of Beauhurst research, which is doing some excellent research on U.K. markets.

The effect of Brexit and other financial disruptions in the chart is clear. Things are shaky, but that’s understandable given the situation. Overall growth is still strong, and while deal numbers dropped, the overall amount invested increased from 775 million pounds to 815 million pounds.

Top-Tier Co-Investors

And importantly, today top U.K. startups are regularly offering shares to the public. By “top startups,” I mean ones with “competitive” funding rounds.

This is a new phenomenon. It’s access to top-tier startup investments alongside great VCs with low minimums… access to deals that the VC investors are paying 2% per year plus 20% of profits for.

These funding rounds are not easy to get into. Startups in this category have buy-in from large influential VCs. This is almost always a good signal. It means a young company should be able to secure more cash down the road if needed. (This is just one of the benefits large VCs can bring to startups. More on that in a separate article.)

In many ways, when an influential VC gets involved, the startup’s value automatically goes up.

Naturally, these rounds involving large institutional investors were historically very hard to access. You needed to either be a very well-respected angel investor, have a personal relationship with the company’s founders, or be a large venture capital firm on good terms with the lead investor.

But now, these types of deals are starting to happen via equity crowdfunding regularly in the U.K.

Monzo, an online “challenger” bank startup, just raised 2.5 million pounds on Crowdcube from 6,500 investors. It was part of a larger round of funding totaling 22 million pounds alongside VC firms Thrive Capital, Passion Capital and Orange Digital Ventures.

In its first round, Monzo raised 1 million pounds in 56 seconds in its first round on Crowdcube. Clearly, Brits seem to like financial tech.

The U.K. also just got its first equity crowdfunding “Unicorn” (a startup worth more than $1 billion). The company is Scotland’s BrewDog, which is kind of the godfather of equity crowdfunding worldwide.

BrewDog just raised more than $200 million from a large institutional investor at a valuation north of $1.2 billion.

This craft brewer has used equity crowdfunding at least four times since 2009 and returned around 2,500% to its earliest equity investors so far.

Prepare Now, Be Rewarded Later

We’re already seeing some high-quality deals in the U.S. (I wrote about a recent standout deal in a guest piece for The Oxford Club’s Investment U.)

But there aren’t yet a lot of deals in the U.S. in which big VCs are investing alongside the crowd.

There will be. Just like it did in the U.K., it needs to become a little more socially acceptable and proven first.

But once the first of these deals come, chances are they’ll fill up fast. And once one startup has a great experience with it, word will spread and more high-quality deals will open up.

Here’s how to prepare for a no-brainer deal coming along.

Make accounts at all the big equity crowdfunding portals. (We have a list coming soon.) Enter your payment information so that if a great opportunity comes along, you can act quickly.

Sign up for email alerts, if necessary. I believe most portals email announcements regularly, but you should also check the sites from time to time.

Start to evaluate the deals that come along – all of them. Look at the valuation, study the traction. Invest tiny amounts in the ones you think are most promising and track them over time.

When you happen to see a deal where a large well-known investor is the lead investor, start digging.

As you’re researching the lead investor, be sure to confirm that they’re participating in the current round of funding. That’s important, because if a large VC fund invested previously but isn’t in the current round, it could be a negative signal (though not necessarily).

Bottom line, if things are going great, the VC will want to double/triple down on their investment. If they don’t invest anything in the current round, try to find out why.

And when you find a deal where well-regarded VCs are leading the new round with a large investment (more than $1 million for early-stage), that’s one that’s at least worth considering.

I hope that explains a little bit of what I look for when scanning for deals with great co-investors. It’s one of the most reliable signals in online startup investing.

Good investing

Adam Sharp
Founder, Early Investing