This week’s announcement that the two major UK equity crowdfunding pioneers, Crowdcube and Seedrs, are planning a merger may have come as a shock to most.
First rumoured back in July, the Crowdcube Seedrs merger will change the face of equity crowdfunding.
Between them, Crowdcube and Seedrs say they have helped raise £2bn for 1,500 companies, including Brewdog, Revolut and Perkbox.
Crowdcube and Seers may be cosy cosy now ahead of their merger – due to be completed by early 2021 – but it wasn’t always so. We have spoken to several companies that looked at both platforms and who were surprised at the level of vitriol that one poured on the other.
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Looking back at the history, it is easy to see why the two crowdfunders spent much of the last eight years at loggerheads.
Crowdcube was formed first in 2011 and started raising money for companies without a Financial Conduct Authority (FCA) licence; Seedrs wisely chose a more sombre route and waited for its licence.
That difference was until recently reflected in the attitudes of both platforms when it came to raising money for companies.
Crowdcube relies on founders solely to present their fundraises in the best possible light.
Seedrs has a more thorough approach. To make a claim on its platform you had to prove it is true – the depth of the proof was often shallow, however.
The Crowdcube and Seedrs merger appears to be a forced marriage of necessity – and not, as their PR portrays it, an exciting growth strategy.
Darren Westlake, CEO and co-founder of Crowdcube, said the merger with Seedrs would “benefit high-growth businesses, their investors who believe in their vision and the wider entrepreneurial ecosystem that supports them”.
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The late filing of Seedrs accounts, just out as I write, confirms the dire straits it is in. Indeed, Seedrs’ auditors said there was “material uncertainty” over the company’s going-concern status. KPMG, the accountancy firm, said there was “significant doubt” over Seedrs’ ability to continue trading for the next 12 months.
Seedrs revenues increased in 2019 to £4.27m and losses were £4.67m. Whilst revenue grew by 25 per cent, the costs base went a little mental and increased from £7.5m to £9.3m. Clearly breakeven, which had been claimed as a reasonable expectation soon, was way out of reach.
Crowdcube is that much larger and older but is still making very substantial losses.
Crowdcube’s revenues grew to £7.68m and costs had been held to £10.3m. So still lossmaking but breakeven – promised some years ago – was on the near horizon, given a fair wind.
Add to this the uncertainty of Brexit and Covid19 and it seems obvious that this is their venture capital backers’ attempt to cut costs and somehow get to breakeven before the ceiling collapses. Looking at the numbers that will be no easy task. Hard hats have been issued.
‘This is potentially where the success of this merger lies’
Clearly, the duel storms of Brexit and Covid have put the jitters up their VC backers. In my view, they could have waited for Seedrs to implode and picked up the pieces.
And this is where it gets interesting.
Crowdcube and Seedrs offered two distinctive ways to fund. But more importantly, Seedrs had a small but successful secondary market – Crowdcube has spoken about venturing into this for years but have never managed it. That is potentially where the success of this merger lies. That ability to offer investors liquidity.
Offers investors liquidity
Currently if you invest in a company on Crowdcube, you have to hold those shares until the company exits or goes bust. There is no market for them. You are stuck. Seedrs created a limited space to trade some shares; limited in that they controlled the price and the timings. But it has been a moderate success. Of course, only shares in companies that have made progress are going to be bought and therefore sold and it’s not an open market – you need to be a Seedrs member. So it’s not really a market, more of a facility for equity release. But it has taken several years to create and there is clearly value in it – for Crowdcube. All good so far.
The issue comes in the quality of the companies applying for and obtaining investment. Seedrs was better in terms of its offer. Then its new CEO, Jeff Kelisky, decided it had to compete head to head with the Crowdcube model. And, as with Funding Circle’s increased default rates, increased volume brought more and more businesses using these two platforms. The backlog of “active” zombie companies funded this way is huge. Our database is proof of this. As we know, a secondary market can only work if shares are worth buying. So a company that valued itself at £10m and used revenue-based growth to back this cannot expect to have shares trading at that value or higher if revenues are in fact £2m. You see the point. Create a better environment with sustainable, sensibly valued businesses and this has a chance.
Many shareholders, who were sold the dream over the past eight years in repeated equity crowdfunding rounds for both platforms, promoted with huge promises of profits and glory, are now just a little irritated that they had no say in this merger or future plans.
This certainly is not the dream of the democratisation of equity investment.
The VCs hold all the cards and the whips. Nothing has changed. Investors have been forced into the newco, like so many sheep herded into the pen. Remember that many investors in Crowdcube do not like the Seedrs model and vice versa – they chose to invest in one and not the other. But now they just have to put up with it. This merger was certainly never mentioned as a possibility.
Cost cutting
The other obvious synergy is cost cutting. Combine the two revenues and halve the total costs and you reach breakeven. But I don’t think it will play out like that exactly. Many investors we talk to use either/or and would not touch the other. And running two different models, if that’s what they choose to do, so the Crowdcube offer or the Seedrs Nominee Offer, under one roof is not going to halve the costs. They require different skillsets. So I think there will be a squeeze on revenues brought about by punters moving on, plus the duel chilling blasts of Covid and Brexit. And that will mean even more cost cutting. We are getting into the bone now.
What choices will this merger give funding companies and investors? Well, it won’t make much difference if they choose to offer both options. There seems little point in a merger if they don’t. It may be slightly simpler with just the one platform. There really are no other pure equity crowdfunding plays on offer in the UK. But watch this space.
We are not overly optimistic about the outcome. In our experience, once VCs start driving down costs, the writing is on the wall. And make no mistake – that is what this merger really represents.
Rob Murray Brown is publisher of ECF.Buzz, the Crowd Investors Network, an online resource for all things crowdfunding
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