crowdfunding: opportunity & challenges for venture...
TRANSCRIPT
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Crowdfunding: Opportunity & Challenges for Venture Capital
ECSF 25th March Brussels
Robert Wardrop Executive Director Cambridge Centre for Alternative Finance
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Summary
Crowdfunding has grown to ~50% of VC annual investment volume in Europe • In the UK, crowdfunding now dominates seed stage investment • Debt crowdfunding is rapidly increasing: now 8x larger than equity crowdfunding
This introduces opportunities for VCs: • Increase in qualified deal flow? • Lower WACC with debt crowdfunding instruments? • More large corporates engaging with crowdfunding?
And also presents some challenges: • Seed stage valuations are increasing – how will this impact VC returns? • Will value-added ‘curated’ platforms and engaged crowdfunders disintermediate VCs? • Is the current model of crowdfunding sustainable – are there adverse selection & moral
hazard risks?
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Taxonomy of ‘Crowdfunding’ for SMEs
Source: Moving Mainstream, Cambridge-EY (2015)
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Extreme variation in crowdfunding volume 2012-2014
Source: Moving Mainstream, Cambridge-EY (2015)
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Crowdfunding volumes for SMEs in 2014
88% of crowdfunding for European SMEs was via UK platforms, and UK volume is growing 40% faster than the rest of Europe.
Source: Moving Mainstream, Cambridge-EY (2015)
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Crowdfunding dominates seed financing in the UK
Source: British Business Bank (2015)
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Crowdfunding is cannibalising F & F and Angel (UK)
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Cannibalisation of VC deals is increasing (UK)
Source: Business Funding Research Ltd (2015)
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Crowdfunding is spreading across development stages
Deal Flow Opportunity Debt Opportunity
Rewards-based Equity-based
P2P lending Invoice trading Debt securities
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Valuation challenge: Is the current model sustainable?
1. Are crowdfunded equity financings overvalued? • Evidence of investor bias: e.g. decision heuristics, local bias effects • Investees/borrowers may be gaming platform metrics to encourage herding • Challenging for VC deal sourcing, but an attractive opportunity for debt issuance
2. Do platform incentives create a moral hazard problem? • Primary source of revenue to platforms is from investees/borrowers rather than
investors: is this the right alignment of interest? • Do investors really understand the returns and illiquidity of the asset class they are
funding?
London Underground, January 2015
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Disintermediation via engagement?
Today, many equity crowdfunders are not passive investors
But as investor participation increases, more crowdfunding investors will need a value-added intermediary
Source: Moving Mainstream, Cambridge-EY (2015)
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Disintermediation via data analytics?
Crowdfunding is generating huge amounts of data.
Intermediaries are providing increasingly sophisticated analytics.
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Which players could disintermediate?
Which player in the crowdfunding ecosystem will be the value-added intermediary?
• The originators (i.e. the platforms)? • Fund managers? • Analytics providers? • Regulated banks? • Financial advisors?
Source: Orchard, (2014)
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Closing thoughts
1. How can VCs exploit the opportunities and manage the challenges presented by crowdfunding?
• Launch a platform, or partner?
2. How can regulators and policy makers ensure that adequate investor protection is upheld while not stifling innovation?
• Getting it wrong could kill the market, and reduce access to finance for SMEs – recent experience in the German Mittelstand bond market offers insights