democratising finance, alternative finance demystified: dealindex research

DEMOCRATISING FINANCE

AGGREGATING DIGITAL INVESTING MARKETS

Alternative Finance DemystifiedJuly 2015

Volume 1 (Digital Equity Investing): An Overview of the Key Players, Investors and Trends that are Shaping the New Model of Online Collaborative Funding

Prepared in Collaboration with Leading Alternative Finance Players Globally

About This Research While researching and analysing the key players and drivers underpinning the digital investment landscape, the DealIndex team uncovered a whole ecosystem of players that have transitioned into the online investment space. We realised that these players and how they interrelate with one another have not been covered before in a comprehensive manner. As such, we have attempted to capture the interlinkages between the swarm of players in the alternative finance space with this report.

This report covers emerging trends in alternative finance as well as offering an overview of the different areas of the sector, with a focus on equity crowdfunding in Volume 1. In subsequent reports we will cover asset classes including real estate and debt in similar detail. Alternative finance is sometimes seen as a broad and opaque space, through this report we outline how its seemingly disparate parts fit together, and where the sector as a whole is headed. We begin by reporting our key findings and trends, before moving on to describing the diverse array of platforms and services offered. We conclude with an analysis of the changing investor landscape in the sector. This report has been prepared in collaboration with several disruptive and leading alternative finance players across three continents and is furnished with many useful case studies. We hope the report elucidates alternative finance for all who may have an interest in this important and rapidly growing sector.

About DealIndex DealIndex (www.dealindex.co) is an intelligent data and deal aggregator of private companies and assets raising capital across leading alternative finance platforms globally. At DealIndex, we take a global, curated approach to the alternative finance ecosystem. We provide extensive data, research and analytics as part of our service to clients. For this reason, we are able to provide data and context on many different aspects of the market. We can offer as much or as little as is required: from a simple, high-level overview of what’s happening now to deeper insight on longer term trends.

Our flagship product (a global crowdfunding aggregator https://dashboard.dealindex.co/) allows investors to navigate and track deals in real-time, manage their portfolio of private company investments, and is backed by extensive analysis, data and research. The dashboard provides single sign-on access to hundreds of private companies seeking capital, bringing together, for the first time, curated, quality deals from leading equity crowdfunding platforms spanning four continents.

DealIndex is part of The Grow VC Group, a worldwide pioneer and leader in the crowd investing, peer to peer and online investment market.

Authors and DealIndex Research Team

Michael Cameron Edward Flach Research and Investment Associate Research and Investment Associate [email protected] [email protected]

Duncan MacDonald-Korth Neha Manaktala Director, Research and Sales CEO & Co-Founder [email protected] [email protected]

Tom Walker Director, Product and Business Development [email protected]

mailto:[email protected]










http://www.dealindex.co

https://dashboard.dealindex.co/



Acknowledgements Collaboration is a cornerstone of alternative finance, and so for this report we have invited our partners to participate in the production process. Such collaboration will allow our readers unparalleled insights directly from players across the alternative finance value chain and from across the globe. Sincere thanks are extended to our 18 global partners who have contributed to the writing of this report. These industry experts and disruptors are pioneering alternative finance in the markets in which they operate and have contributed truly unique insights. We have received contributions from alternative finance disruptors across Belgium, Canada, France, Germany, Israel, New Zealand, the United Kingdom and the United States.

We are privileged to have first hand insight on the disruption, evolving models and the change each of these players are pioneering in their markets. It is great to be able to bring all this together so our readers can gain a better understanding of the alternative finance ecosystem in markets across the globe: the issuers, the investors, the regulations, the challenges, the similarities, the differences, constantly changing models, collaboration with the financial services industry, and the rapid pace at which this market is evolving. These unprecedented insights from players across the ecosystem, including crowdfunding and M&A platforms, infrastructure, data and technology providers, and advisory firms, have helped us develop a global and more complete picture of the different parts of alternative finance and how they work together. We are overwhelmed with the response and are grateful for the time and effort all of our partners have taken to contribute and participate in this research.

Note From Some of Our Partners

"The digital investing and lending market has grown dramatically in recent years. While the growth is unprecedented, the market is lacking in fundamental data and insight, the type that DealIndex has set out to foster. At Crowd Valley, we believe in universality and transparency in this market and through our digital back office product, we aim at catalysing the markets development through robust middle and back office tools for operators, as well as for the buy and sell side stakeholders. That is why we partner with leading stakeholders in the market that have a digitally native approach to the changes and opportunities in the financial service market." Markus Lampinen, Co-Founder and CEO, Crowd Valley

“I was fascinated to preview this report, shows how new thinking is reframing the finance world, some inspirational stuff and growing scale. Soon, more the new normal than the alternative!” Lin Feng, Founder & CEO, DealGlobe

Contributing Partners

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Note From Some of Our Partners

“FinTECH (Financial Technology) is revolutionising the capital markets! DealIndex provides valued insights regarding how companies and investors are leveraging technology to streamline the investment process. Equity crowdfunding/direct investing has the potential to emulate peer-to-peer lending’s (~Prosper) success as equity investors increasingly migrate online gaining access to premium deal flow at lower costs.” Scott Jordan, HealthiosXchange

"Regulated crowdfunding is the most disruptive form of alternative finance available today. As is the case for any form of alternative or traditional finance to flourish, regulated crowdfunding requires a cohesive eco-system and an integrated infrastructure to bring it all together. Seamless infrastructure technology is the key to integrating the eco-system and ensuring the continued success of regulated crowdfunding. We are delighted to be able to contribute to this Alternative Finance report on how the eco-system works and the importance of proper infrastructure" Oscar A Jofre, Founder, President/CEO, KoreConX

“We are at the forefront of the crowdfunding industry, leading the efforts to democratise capital for all entrepreneurs.” Jeffrey Fidelman, Head of Investor Relations, Onevest

“We were happy to contribute to DealIndex's research, the platform that will become a very useful tool for us." Grégoire Linder, CEO France, Raizers

“While the growth of alternative finance is racing ahead, there has been a dearth of research for those seeking to gain a deeper understanding of the past, present, and future of this market. DealIndex's report sheds light on this dynamic and diverse market, providing insight to the digital investment sector, as well as delving into case studies from various partners in this space. As New Zealand's leading equity crowdfunding platform, we feel that it's important to contribute to this report and help bring alternative finance into sharper focus for global stakeholders.” Josh Daniell, Co-Founder & Head of Platform, Snowball Effect

“As alternative finance increases in size, so does the complexity of its ecosystem. This report is a gold mine for anybody looking to gain an overview of the ecosystem and find out who the main players are in their respective areas.” Gonçalo de Vasconcelos, CEO and Co-Founder, Syndicate Room

"In order for equity crowdfunding to thrive and develop in to a long term and sustainable asset-class, I strongly believe that sound investment principals need to be adhered to and the industry needs to demonstrate that it can consistently deliver returns for its investors in line with the risk they are taking. At VentureFounders we are not going to deviate from our core principals of providing investors with exciting and interesting investment opportunities that are appropriately structured for the risk that investors are taking. This in-depth industry report drills down on various aspects of the alternative finance ecosystem. It is great to be able to feature our unique insights on the fast growing equity crowdfunding industry.” James Codling, Co-Founder, VentureFounders

Table of Contents

Infrastructure: The Importance of a Comprehensive Support System

Investors: A Mix of Both Retail and Institutional

Platforms: The Evolution and Emergence of New Platform Models and Asset Classes

Data and Marketplaces: Shifting Towards a More Data Driven Approach To Investing

Executive Summary: Summary Observations, Key Findings and A Message from the Founders

Issuers: Investment Activity Moving Upstream

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20

24

31

51

58

65

Introducing the Alternative Finance Ecosystem: Who Are The Key Players and How Do They Interrelate With One Another

Conclusion: Looking Forward74

5

CONTRIBUTING PARTNERS

Crowd Valley powers the future of financial services by providing marketplace technology and API Back Office solutions. The company enables online investment platforms; peer to peer lending, equity and debt marketplaces

Equidam provides a business valuation tool that helps SME’s to manage their value, investors to achieve the required return and invest in the best ideas, and early stage companies to grow and prosper

AgFunder is the world’s first equity-based investment platform created specifically to connect investors with world-class agriculture and agtech investment opportunities from around the globe

Bankless 24 is a German crowd investing platform for the SME sector. Investors can invest in medium-sized companies from 100 euros. Businesses get access to alternative finance

Crowdfundraiser is an expert across the crowdfunding ecosystem, connecting capital between investors and entrepreneurs. It provides services related to both debt and equity alongside liquidity solutions for investors and founders

DealGlobe provides an online platform for investors and corporate professionals seeking investment and partnership opportunities. The company's primary focus is on small and medium sized enterprises with the aim of bridging the information gap between Europe and China

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US Page 41

GERMANY Page 45

US Page 50

HK, UK, US 2

Page 47CHINA, UK

NETHERLANDS Page 60

CONTRIBUTING PARTNERSEquityNet has operated one of the largest business crowdfunding platforms since 2005. The multi-patented EquityNet platform includes over 100,000 individual entrepreneurs and investors, incubators, government support entities, and other members of the entrepreneurial community. EquityNet provides access to thousands of investors and has helped entrepreneurs across North America raise over $330Mn in equity, debt, and royalty-based capital

US Page 35

HK, UK, US Page 64

Grow Advisors is the consulting and advisory unit of The Grow VC Group. Grow Advisors offers professional services aimed at growing crowdfunding, crowd investing and P2P finance around the world

HealthiosXchange is an investment marketplace dedicated exclusively to the global healthcare industry, employing crowdfunding as the cornerstone of a new paradigm in healthcare investing, the company offers direct access to the broadest investment opportunities

US Page 48

iAngels is an equity crowdfunding platform that gives accredited investors the opportunity to become angels in their own right by investing in technology startups alongside top tier angel investors in Israel

ISRAEL Page 42

KoreConX supports the crowdfunding and capital markets industry by supplying the eco-system infrastructure platform (ESIP). The ESIP is utilised for pre-during-post crowdfunding transactions by facilitating due diligence of issuers, data repository/deal room and shareholder management/communications

Page 63CANADA

MyMicroInvest is a lending and equity based crowdfunding platform in Europe. The platform is based on the co-investment principles between crowd and professional investors and has already facilitated €10Mn investment in over 30 European companies. MyMicroInvest has also developed a system allowing SMEs to make a public offering online by automatising the prospectus redaction and establishing a relationship of trust with the Financial Services and Markets Authority

BELGIUM, EU

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Page 36

CONTRIBUTING PARTNERSOnevest is reshaping the private equity industry by democratising early stage investing: connecting founders to capital allowing their ideas to transform into successful companies, simultaneously creating new investment opportunities for individual investors

US Page 37

Snowball Effect is New Zealand's leading equity crowdfunding platform, with around 75% of market share. This highly curated platform aims to attract the best quality companies and investors, and is focused on growing carefully to encourage a sustainable equity crowdfunding market over the long term

NEW ZEALAND Page 39

SyndicateRoom is an online equity crowdfunding platform that allows its members to co-invest in exciting companies with seasoned investors. Members co-invest alongside Business Angels

UK Page 43

TradeUp is an equity crowdfunding platform for globalising companies, a rapidly growing and outperforming segment. It helps export-driven companies to connect and transact with accredited investors

Page 45CHINA, UK

VentureFounders is an equity crowdfunding platform with a wealth of investment and startup experience. The company is pushing the boundaries of what can be achieved in the crowdfunding market by presenting investors with a range of curated, structured and diligenced investment opportunities

UKPage 44

FRANCE, SWITZERLAND, DENMARK

Raizers is a crowdfunding platform for entrepreneurs. The Pan-European platform is a collaborative space with innovative features that facilitates the relationship between entrepreneurs and investors

Page 38

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Private Investment is Moving Online. While

Executive Summary

Private investment is moving online. While alternative finance started off as a seed stage endeavour, more recently platforms have begun to emerge at different stages in the funding cycle, disrupting traditional institutions

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PREFACE: A PARADIGM SHIFT IN FINANCIAL SERVICES

Alternative Finance is a new phenomenon, and it is taking the world by storm. With over 1,250 crowdfunding platforms worldwide, this new model of collaborative funding is breaking boundaries and defying the status quo as to how issuers source capital. In light of this paradigm shift and plethora of platforms, we perceived the need to develop an alternative finance aggregator that would instantaneously display quality private investment opportunities from curated platforms, all in one centralised marketplace.

We embarked on this mission to pioneer an innovative dashboard to address the ‘pain points’ often faced by sophisticated investors who are keen to invest in private companies across all corners of the globe. It is throughout the course of this 12-month journey and vigorous research-driven process that we discovered the relative dearth of information on this burgeoning sector. This industry report thus aims to offer a comprehensive overview of this emerging sector, as well as to provide valuable insights on the complexity of the wider alternative finance ecosystem from various perspectives.

As we set out to develop DealIndex as an alternative finance aggregator, our first port of call was to define the term “alternative finance” and to research the key players underpinning this rapidly evolving sector. While alternative finance is primarily known for crowdfunding and P2P lending, we discovered entire asset classes, important functions of investment banking, including a supporting ecosystem of due diligence, risk management, and infrastructure that had transversed the offline and online world of financial services. We started to see how these seemingly disparate players in alternative finance - involved in different aspects of fundraising, and from all over the world - are interrelated. Assets including alternatives and M&A, represent significantly bigger (albeit challenging) asset classes and have started moving online. More importantly, we learned how these players mirror traditional investment banking services and had already started collaborating with the financial services industry.

Some of the themes underpinning alternative finance include: 1. Increased transparency and access to otherwise closed off asset classes; 2. Redefinition of the term “investor” across the entire spectrum of private and public asset classes. The crowd

gets access to privileged deals and the world’s largest financial institutions have started investing in companies much earlier in the life-cycle of a company;

3. Collaboration is a cornerstone of the industry as the syndication model takes hold with mobile, social media and millennials all generating network effects;

4. Increased volume of funding activity in private companies & assets, and increased amounts of companies getting funded with customers getting involved in product development / playing a role in innovation as investors; and

5. How technology, speed, and data have come together to reduce the inefficiencies in searching and accessing private investment opportunities, thereby saving issuers and investors time in the procurement process.

Alternative finance has already demonstrated its potential to change the way fundraising is carried out by private companies by implementing a much more democratic, transparent and efficient process for both entrepreneurs and investors. Issuers get increased access to diverse funding options, while online platforms alleviate the time, effort and costs associated with fundraising, in addition to generating increased marketing and product awareness.

Democratising Finance Executive Summary

Neha Manaktala CEO and Co-Founder, DealIndex

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Having been on both sides of fundraising, it is exciting for me to be part of the potential to improve the way different aspects of financial services are performed; all the while deepening collaboration, not just between alternative finance players, but with the financial services industry in general


“The definition of investors itself has evolved since the advent of alternative finance and the surge of online platforms. Increasingly, we are witnessing changes to investment behaviour since the start of syndication of investment online. Furthermore, access to global investment opportunities has led to a more data-driven approach to investing.

Despite growing into a $16.4Bn industry in 2014, it is still a drop in the ocean compared to the $3.3Tn addressable market opportunity. Although crowdfunding is still often dismissed as a niche activity associated with rewards or donations, the industry has developed into an entire ecosystem that is constantly evolving. Growth has been exponential with players across the entire funding lifecycle offering diverse and alternative fundraising options. Most of these alternative finance players already have a significant amount of collaboration with the financial services world.

Finance is a singular industry with its ramifications permeating every single part of the economy. As an ex-Lehman Brothers investment banker who witnessed the Great Financial Crisis first hand in 2008, I am constantly reminded of these important principals. With rapid growth in the alternative finance space, comes the need for increased maturity in the industry and systems to contend with the unknown and untested impact of changing credit and interest rate cycles, liquidity squeezes, fluctuating asset pricing and valuations and the impact of the macro economic environment. Moreover, with increased funding rounds, shorter capital raising cycles, diversified and changing investor bases in private companies, structured offerings and more sophistication being applied so early on in the life of a company, comes the need for best practices to be applied from financial services. Due diligence, risk and portfolio management, research, liquidity channels / secondary market - these are all vital parts of finance and are now beginning to permeate alternative finance.

Alternative finance is removing information barriers and information inefficiencies that exist in the private market, opening funding conduits and channeling global liquidity. At DealIndex we take a global, curated approach to the alternative finance ecosystem. We give you a pulse of the market through the provision of data, research, analytics and context on the wider ecosystem. The availability of private company data is a game changer and everyday we are fascinated by the volume of data and patterns that emerge as we observe dealflow going live from different corners of the world across platforms, asset classes and sectors, all in real-time.

Having been on both sides of fundraising including at Morgan Stanley Investment Banking, Actis Private Equity and as an entrepreneur, it is exciting for me to be part of the potential to improve the way different aspects of financial services are performed; all the while deepening collaboration, not just between alternative finance players, but with the financial services industry in general.

I would also like to extend my grateful acknowledgement and appreciation for all our partners and to those who have contributed to this report. It would not have reached you in its present form without them.


While alternative finance started off as a seed stage endeavour, more recently platforms have begun to emerge at different stages in the funding cycle, disrupting traditional institutions. Drawn by the increased access to investors that operating online affords, platforms now make it possible for companies to raise capital at every stage of the funding cycle online.

As the market grows in size, so too are more institutions investing in the sector. As much as 66% of the loans originated at Prosper were snapped up by large institutions in the 3rd quarter last year. Similar figures across other P2P platforms highlight an increasingly institutional marketplace. While equity investment remains someway behind the P2P market in this respect, things are beginning to change with more VC’s participating in crowdfunding campaigns. This is expected to only strengthen as more tools for sophisticated investors emerge.

Originally seen as a solution to the long-standing funding gap for early stage companies that appeared in the wake of the 2008 financial crisis, the ability for issuers to raise capital more quickly and at a lower cost than would otherwise be possible at traditional institutions coupled with a host of other benefits such as the increased marketing awareness and customer loyalty has meant that crowdfunding is now seen as an attractive option by many issuers.

ALTERNATIVE FINANCE IS DRAWING MORE ESTABLISHED ISSUERS

As the private investment market moves online, the ability to harvest large quantities of data surrounding investment decisions becomes easier. Furthermore, tools that allow investors to then analyse the data, uncovering trends, are enabling more informed decisions. This is a radical change for the private investment market given its historically closed-off nature.

AVAILABILITY OF DATA IS CHANGING

KEY FINDINGS

Many have wondered if the alternative finance space is set to upend the traditional early stage investing business model. While this angle is hyped, in reality it is emerging that venture capital and alternative finance will work side by side. Rather than disrupting, alternative finance is developing a collaborative and synergistic model. Evidence of this can be seen in the growth of investor-led platforms, as well as the adoption of digital finance by major businesses like Goldman Sachs and Metro Bank.

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PRIVATE INVESTMENT IS MOVING ONLINE

INCREASING INSTITUTIONAL INVOLVEMENT

COLLABORATION RATHER THAN DISRUPTION


INTERESTING FACTSValue of the Early Stage Investment

Market2

$300Bn

Number of Crowdfunding

Platforms Worldwide4

1,250Estimated Revenue

Crowdfunding Added to the Global Economy in 20143

$65Bn

Alternative Finance Immediately Addressable

Market Opportunity1

$3.3Tn

Equity crowdfunding average growth rate

2012-20145

410%Number of jobs crowdfunding

created in 20143

270,000

VC Industry annual average6

$30Bn Estimated Crowdfunding

Market 20156

$34Bn Angel capital

annual average6

$20Bn > >

100M+Unaccredited

investors in the U.S.

351%Increase in quarterly revenue post equity

crowdfunding

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What role have governments played in the adoption of digital investing and lending in areas where adoption has been the fastest? Governments play a very important role in digital investing markets, anyone who innovates spends significant effort on doing their own risk assessment and due diligence. While it’s understandable that laws and regulations typically follow innovation, the most important factors for risk assessment are the easy availability of information and the clarity of the regulatory environment. When the rules are less clear, the way the government reacts to innovation is important. For example, in the UK and US, the governments have led and openly communicated their views on innovations in alternative finance and how they plan on acting should the market move adversely. It is important to open a dialogue and build mutual trust between all parties and this approach sends a positive signal to those in this new market.

How do start-up ecosystems across different countries benefit from alternative finance, especially in attracting international investors and how can data on digital investing and lending benefit start-up ecosystems? New digital investing models and related processes accelerate start-up ecosystem knowledge especially with reference to investment processes and investor expectations. In general, they can help a city or country to “skip a generation” of trying to only build or grow traditional “offline” based risk finance models like grants, traditional business angel and venture capital models. Furthermore, in mature markets, business angels and VC’s are already moving onto digital platforms and investing alongside the crowd. In addition by applying digital marketplaces in different countries and cities, one can productively showcase the best regional investment opportunities in the international market, channelling opportunities to different audiences beyond the single marketplace itself.

One of the fundamental differences between digital investing and open marketplace models is that, instead of a company having to limit itself to specific funding instruments rules or limitations, it can freely structure its offering and then let the market decide if it’s interesting.

ALTERNATIVE FINANCE: ROLE OF GOVERNMENTS, STARTUP ECOSYSTEMS AND INVESTORS

Valto Loikkanen Co-Founder & Chairman, DealIndex; Co-Founder & CEO, Grow VC Group

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What has been the evolution and strategy of the Grow VC Group and why did you and Jouko set it up? The idea was to help scale entrepreneurship and identify innovations in the context of the recent financial market failure. We also wanted to harness the power of social networks that brought people to the online world. Both of us have experienced successes and failures in building innovative companies and have learned that market timing is key. We could see we were very early to the market and had difficulty trying to communicate our vision and business model to others. The initial idea for equity crowdfunding was in the summer of 2008, when Facebook only had 100 million users. The name ‘equity crowdfunding’ hadn’t yet been coined and as such we had a hard time explaining it. Initially we called it Venture Capital 2.0. Furthermore, it was hard for many to believe in. It therefore became evident that we would have to commit to a long journey and approach it globally from the start in order to reach the necessary volume of users. Today there is a broad scope of opportunities within various alternative finance sectors.

As an entrepreneur yourself, what are the benefits that alternative finance has for start-ups and founders in the fundraising process? Overall, alternative finance simplifies things and makes the process more transparent. In addition, founders also can gain a lot more knowledge about other companies that have used the process before them. It can be a bit scary to put your business out there as it’s possible that you may not be successful in fundraising, but for any genuinely good deal, with a good valuation, that is well structured and with a good team behind it, it is a very good option. It must be stated that whenever there are more options than before, it is generally a positive thing for everyone and for any company that has high growth ambitions, the digital fundraising process forces them to learn how to communicate with investors early on. This alone is valuable for the future. From a general perspective the digital finance market is all about better access, transparency and efficiency. This, together with the data that this digital market generates, leads to ever faster learning and further development of all areas it spreads to.

The digital finance market is all about better access, transparency and efficiency…..Whenever there are more options, it is generally a positive thing for everyone and for any company that has high growth ambitions, the digital fundraising process forces them to learn how to communicate with investors early on. This alone is valuable for the future…

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1

2

3 4


MARKET DRIVERSALTERNATIVE FINANCE IMMEDIATELY ADDRESSABLE MARKET OPPORTUNITY1

DATA AND TECHNOLOGY DRIVES DECREASE IN COSTS AND INCREASE IN USAGE1

ADVISORY FEES (2014); DECREASE IN COSTS

INCREASE IN USAGE

CHANGING DEMOGRAPHICS1 MACRO ENVIRONMENT14

Millennials 10X more likely to use P2P

Lending than Boomers

Millennials already using alternative non-

bank financing Avg. Yield P2P Lending Average Interest Rate for Total Marketable Debt

April 2015

Low interest rate environment drives yield hungry investors to alternative finance

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5

6

7


MARKET DRIVERSGLOBAL CROWDFUNDING MARKET4,5

Worldwide Crowdfunding in 2014: $16.2Bn YoY Growth 2013/2014

DEMAND FOR DIGITAL INVESTMENT OPERATIONS Q420147

NETWORK EFFECTS YIELD EXPONENTIAL GROWTH1

50% Of all Lending Tree/Prosper loans originated in Q4 2014

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Over the last few years, much has been made of the potential for alternative finance to disrupt the traditional financial industry, including subverting the established bank loan process with P2P lending. Some may wonder if this will actually be the case, and additionally, whether alternative finance as a whole, will disrupt the traditional early stage investment industry.

Thus far, it appears the alternative finance market is actually moving in the opposite direction. Rather than trying to supplant banking and venture capital, a collaborative model is emerging whereby digital platforms work side by side with traditional investors. This trend is evidenced by a number of developments. There is an increasing trend towards investor-led platforms. Such platforms allow individual investors to follow the lead of an accredited investor, showing how traditional financing and alternative financing can work in harmony.

The emergence of a secondary market for private company shares is making it easier than ever for institutions to participate in the space. According to media sources like the Financial Times, even businesses as regulated and traditional as mutual funds are now investing in private companies, such as Uber and Pinterest. Large institutions are starting to utilise P2P lending as well, with the UK’s Metro Bank announcing that it would start lending customer deposits through P2P platform Zopa. Goldman Sachs itself, widely seen as the pinnacle of traditional investment banking, has even announced that it will start lending through a digital consumer-driven platform. All of these points show how rather than disrupting traditional financing models, alternative finance is developing its own collaborative niche within the industry.

ALTERNATIVE FINANCE: DISRUPTION OR COLLABORATION?

Rather than trying to supplant banking and venture capital, a collaborative model is emerging whereby digital platforms work side by side with traditional investors and financial institutions.

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Global easing of regulations around the world is opening up the private investment market to larger numbers of investors. In the US, changes to legislation allowing for companies to state publicly that they are raising funds meant that the market was opened up to accredited investors in 2013. Regulators recently went a step further and now non-accredited investors have access to the asset class for the first time under Title IV.

REGULATION

Millennials desire for fast, seamless user experience coupled with their preference for online, mobile-first solutions is changing consumer investment behaviour. Furthermore, they are drawn by the greater transparency and increased involvement in the investment process that online funding platforms afford.

CHANGING INVESTMENT BEHAVIOUR

With crowdfunding’s roots in the donation/rewards based category, it did not take long for the sector to evolve and incorporate P2P lending and equity platforms. Furthermore, there are now platforms at every sector of the funding cycle while other online tools such as data providers are evolving to compliment the fast moving sector.

INNOVATION

Investors are incentivised to share campaigns across their network in order that the funding target is reached and as such, alternative finance is an increasingly social market. Furthermore, strong network effects mean that as platforms draw more investors they will draw more issuers and vice versa. All this makes it easier for online platforms to recruit customers than their traditional bricks and mortar counterparts.

CUSTOMER ACQUISITION


GROWTH DRIVERS

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INTRODUCTION

If the Alternative Finance sector does reach its forecasted $34.4Bn in funding in 2015, it will have surpassed the venture capital industry’s $30Bn of annual funding volume6

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Born out of the ashes of the 2008 financial crisis, alternative finance, which encompasses practices like crowdfunding and peer-to-peer lending, has grown rapidly as a means of financing globally. Beginning as an online extension of traditional financing by friends and family, alternative finance has given rise to truly global online communities of investors and issuers, democratising, globalising and streamlining the capital raising process.

There are many examples of early crowdfunding campaigns, but it has been the combination of a number of factors that has allowed it to grow into the industry that we recognise today. Technological advances, namely the advent of Internet 2.0 has meant that users can enjoy greater interactivity online, while the squeeze on bank lending and low interest rates post 2008 have pushed issuers and investors to explore non-traditional financing and investment models.

Since 2008, individuals and companies have successfully raised billions of dollars in debt, equity and donations online. Worldwide, some estimates put the total alternative finance market at $16.2Bn in 2014, more than double the $6.4Bn it was in 2013, but still some way short of the $34.4Bn it is expected to reach this year. If the sector does reach its forecasted $34.4Bn in funding in 2015, it will have surpassed the venture capital industry’s $30Bn of average annual funding volume. Such success has given rise to a new, but still nascent, digital investing ecosystem of issuers, investors, funding platforms, marketplaces and information providers that are challenging the traditional players.

Though led by developed nations in a geographic sense, particularly the United Kingdom, the United States and China, which, according to some estimates make up 96% of the financial return crowdfunding market, no single region controls the digital investing landscape as we know it today. It operates on a truly global basis. As with the development of any new financial market, the regulatory environment remains fragmented, differing across geographies not only in a rule-making sense but also in maturity, clarity and relevancy. Moreover, funding platforms, service providers and data availability all remain fragmented as well.

As the Statue of Liberty was being shipped from France, efforts by the US government to raise money for a pedestal for the statue to stand on had stalled. By the summer of 1885 it seemed like all options had been exhausted.

Renowned publisher Joseph Pulitzer took it upon himself to launch a fundraising campaign through his newspaper the New York World. He sought lots of small donations from a large number of people and within 5 months had raised the required $100k from 160k ordinary Americans.

Pulitzer used a single collection point to collect small amounts of money from a very large pool of donors and if this was launched today, the campaign would resemble a reward/donation based crowdfunding campaign similar to those run on Kickstarter and Indiegogo.

STATUE OF LIBERTY

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DI Sphere: Mapping the Digital Investment Ecosystem

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Democratising Finance Introduction

The ecosystem on the previous page stands to highlight the various sectors and major players that make up the alternative investment market. Whereas traditionally a young company would look to family and friends for seed capital, a bank to borrow from, a VC to provide growth capital and the public markets for liquidity, there are now online platforms servicing every step of the funding cycle. Despite the existing fragmentation, as a whole these players are creating an integrated digital landscape that serves a specific economic need: to provide capital to growing enterprises that do not have access to capital under traditional finance methods and/or to provide capital in a more cost effective way than traditional sources.

In effect, alternative finance is removing information barriers and opening funding conduits into the private investment market for both issuers and investors, resulting in a more accessible asset class. There are added benefits too for

entrepreneurs who choose alternative funding routes over more traditional routes, such as increased product awareness and a more developed customer base.

This report aims to highlight and breakdown the various sectors that make up the overall alternative investment ecosystem. The alternative finance ecosystem has evolved over the past decade and consists of players in differing segments across the globe including:

• Funding platforms: rewards, debt, and equity

• Liquidity platforms • Private placement platforms • Alternative investment platforms • Online M&A platforms • Data and research providers • Back office and support providers • Business intelligence providers

WORLDWIDE ALTERNATIVE FINANCE4,5

ALTERNATIVE FINANCE IN EUROPE5

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ISSUERS

Initially platforms primarily featured young companies raising seed stage capital at a time when it was hard to access traditional funding sources, but now, the industry is moving upstream and is attracting more established businesses, drawn not just by the speed and cost savings but by a host of added benefits too

“

Democratising Finance Issuers

From alternative finance, equity and debt-based crowdfunding emerged to fulfil an important portion of a developing SME’s funding cycle known as the funding or capital gap. Whereas VCs and even angel investors are increasingly looking for businesses with a clear path to exit (somewhat a function of their increasingly traditional investor bases), excluding the majority of young companies f r o m f u n d i n g , e q u i t y a n d d e b t - b a s e d crowdfunding stands to provide capital to businesses that are moving from prototype to start-up to early growth without forcing them to call upon friends or family for capital at a stage that is too early for traditional bank funding. Moreover, requirements for series A rounds are becoming higher, forcing companies to raise prior rounds.

Basel III, resulting in new regulations and capital rules has meant that banks are increasingly strained in their ability to lend to SME’s. This coupled with the fact that even small lines of credit are taking increasingly longer amounts of time to approve has created a funding vacuum. Specifically, in its October 2014 Senior Loan Officer Opinion Survey, the Federal Reserve noted that the majority of respondents indicated that underwriting policies on small business loans were tighter than their average over the last decade. Alternative funding methods stand to reduce this working capital gap. Such reduction in time to funding could have

massive implications for small businesses and overall economic growth.

Alternative finance platforms ability to reduce this working capital gap and time to funding has meant that they are beginning to attract the attention of larger, more established issuers and that has led to investment activity moving upstream in the last couple of years.

In March 2014, Facebook made an announcement that they were taking over Oculus Rift, the virtual reality gaming headset manufacturer, for $2Bn.

What made this exit particularly interesting was that two years prior to the announcement, Oculus Rift raised $2.4Mn via the Kickstarter platform. In return for donations, donors were given T-shirts, posters and for larger donations, developer kits. While the exit did not reap any financial rewards for the donors, it further highlights the potential of investing via crowdfunding.

FACEBOOK ANNOUNCES ACQUISITION OF OCULUS RIFT FOR $2BN

CROWDFUNDING DEALS BY STAGE 2014/155

CROWDFUNDING INVESTMENT BY STAGE 2014/155

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This year, Lending Club has announced partnerships with both Google and more recently Alibaba, to whom they will provide small business loans of up to $300k to US businesses that are looking to buy inventory from the Chinese eCommerce site. This is of particular note due to the fact that Lending Club is replacing an established, traditional Chinese bank and highlights the threat traditional lenders face from this still infant industry.

LENDING CLUB

Earlier this year, JustPark, previously backed by BMW and Index Ventures, used Crowdcube to raise £1 million of growth capital at a time when it would have usually looked to more traditional funding avenues. JustPark citied one of the key drivers as being the fact that by giving their customers the opportunity to invest in the company it would make them less likely to join competitors in the future.

NEARDESK

NearDesk, who rent desks and meeting rooms by the hour around the UK, recently raised £1Mn via Seedrs. The capital will be used as growth capital and follows previous funding rounds raised online. NearDesk saw VC’s Juno Capital and Renaissance Capital take part in the online round.

In October 2014, UK-based winemaker, Chapel Down Group, raised £3.95 million via Seedrs, making it the first publicly listed company to a c c e s s t h e p u b l i c e q u i t y m a r ke t s v i a crowdfunding. The funds were raised to promote growth and necessary investment to support that growth. Similar to companies raising in the non-public sphere via crowdfunding campaigns, Chapel Down cited the ability to build a significant body of shareholders as a primary reason for using an alternative finance fundraising model.

In 2013, Nicola Horlicks, a highly regarded fund manager, raised £150k via Seedrs. The money was sought to allow her to start raising capital for her first investment fund. Since then, she has raised follow-on investment via Seedrs, to the tune of £450k and increased the fund target from $100 million to $250 million because of investor appetite.

CASE STUDIES

The Mill Residential REIT became the first real estate investment trust to utilise the power of the crowd, when it raised £2.1 million in just three weeks via Syndicate Room last year. In total they raised £3.5 million, with the balance coming from institutional investors. The round preceded a listing on AIM a couple of months later, giving investors immediate access to liquidity and was one of the main reasons that the round was so well received. Furthermore, the structure stands to highlight the increasing sophistication that is becoming prevalent in alternative finance.

CHAPEL DOWN JUSTPARK

MILL RESIDENTIAL REIT

NICOLA HORLICKS

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Alternative lending has moved on from providing smal l -scale loans to consumers and seen exponential growth since 2010, when the industry self-imposed restrictions to address default rates that were sometimes as high as 30%. Their ability to extend credit in a quicker and more cost effective manner than traditional banks has meant that the industry now encompasses more commercial loans and is providing credit to a growing number of SME’s.

In equity crowdfunding there is evidence of a similar theme developing. Initially platforms primarily featured young companies raising seed stage capital at a time when it was hard to access traditional funding sources, but now, the industry is beginning to move upstream and is attracting more established businesses, drawn not just by the speed and cost savings but by a host of added benefits too.

Aside from the aforementioned benefits, early stage companies have reported seeing increased Angel and VC interest immediately after closing a round through crowdfunding. In a recent study, 71% of businesses reported that within 3 months of closing a fundraising round that they had either taken on investment (or were in discussion to) from Angel investors or VC’s5.

Other reasons private companies are drawn to raising capital online include the increased marketing awareness that engaging with funders brings, from becoming more aware of new market opportunities, to understanding which features resonate with people and gaining insights into competitors. A number of firms are reported to have even scrapped their marketing plans and completely rewritten them subsequently.

Democratising Finance Issuers

CHARACTERISTICS OF UK CROWDFUNDING ISSUANCES5

Summary of benefits for entrepreneurs/issuers of raising money online:

• Efficiency • Access to wider investor base • Marketing/product validation • Democratic process • Newfound comfort with investor structure

now in crowdfunding

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DEALINDEX DASHBOARD INSIGHTSDemocratising Finance Issuers

DEALFLOW STANDARDISED ACROSS LEADING EQUITY CROWDFUNDING PLATFORMS GLOBALLY

AVERAGE AND MEDIAN DEAL SIZES

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DEALINDEX DASHBOARD INSIGHTSDemocratising Finance Issuers

SECTOR ANALYSIS: FUNDING GOALS, VOLUMES, SHARE OF SPEND

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The race towards embracing crowdfunding has spread globally. Crowdfunding platforms globally raised a total of $16.2Bn last year, according to a recent crowdfunding industry report by Massolution, a research firm. Regulatory reform, international expansion and cross-border deals have helped boost the industry, as has a tide of investors seeking rewards or equity in return for their cash. Among all the regions, Asia is leading the race in terms of growth, with a 320% increase in funding volume. With $3.4Bn raised last year, Asia is experiencing the highest growth in the crowdfunding sector and has surpassed Europe ($3.26Bn raised) to become the second-largest crowdfunding region. In 2015, crowdfunding in Asia is forecast to grow by more than double the rate of that in North America.

What are the Trends Driving this Crowdfunding Revolution in Asia?

First, while rewards and equity-based campaigns typically get the most headlines, it is actually lending-based crowdfunding that dominates the industry: in 2014, it raised $11.08Bn. Part of that, according to Massolution founder and CEO Carl Esposti, is explained by the strong growth of crowd-based lending in Asia: “Surprises materialising from this year’s research included the astounding growth in the P2P and P2B lending market in Asia, stemming largely from the Chinese market.”

Other key drivers underpinning the rampant growth of crowdfunding in Asia can be attributable to the following three factors:

1) Online marketplace popularity (explosion of retail e-commerce). It is estimated for APAC to outspend North American by $40Bn. In fact, 45% of all buyers worldwide on retail e-commerce come from Asia.

2) Social media penetration and savvy. 52% of social media users and 47.6% of mobile users are from Asia. 3) Success and popularity of crowdfunding. Singapore now ranks in the top ten worldwide for crowdfunding.

Compound this by the fact that two thirds of the world’s global middle class will live in Asia by 2030 with $3.5Bn coming from emerging economies; crowdfunding in Asia is clearly here to stay and is poised for even more rapid growth.

Is Asia Ready For Crowdfunding?

Asian markets and regulatory structures are not as sophisticated nor developed as say, the Americas. As such, this naturally begs the question as to whether Asia is really ready to embrace the crowdfunding tidal wave? According to Doctor Jeffrey Chi, Managing Director of Vickers Venture Partners and Chairman of the Singapore Venture Capital & Private Equity Association, the answer is that Asia is absolutely ready to embrace the crowdfunding movement. It is his view that emerging markets are actually more suitable for crowdfunding than mature markets. This is because gaps in the marketplace and lack of access to capital are more pronounced in these markets.

“Crowdfunding in Asia Poised for Rapid Growth”

Director, Marketing & Business Development, DealIndexMICHELLE TANG

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PLATFORMS

Over time one would expect a broad swath of financial services currently carried out at bricks and mortar institutions to transition to alternative models as business and cultural support is gained

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Reward Crowdfunding Popularised by Indiegogo and Kickstarter, donation-based funding allows users to make donations to companies or non-profits raising capital in return for an incentive. Those incentives include early access to products, gifts, or an increased sense of self-worth. Compared to equity and debt-based models, rewards based crowdfunding applies mainly to firms in the idea or early prototype phase, or organisations that wouldn’t seek traditional financing like not-for-profits. As recently as July 2015, Kickstarter had $1.8Bn in pledges by 9Mn+ total backers.

Reward based platforms, such as Kickstarter, have proved particularly beneficial to companies who are developing products. The platforms provide an important portal through which issuers can market their product directly to consumers, gain feedback on initial prototypes and validate their ideas, essentially de-risking the process of starting a business. In turn, this makes it more likely that they will go onto raise Angel/VC rounds in the future.

However, with the present capital gap for enterprises in both the start-up and early growth phase discussed above, alternative finance solutions have rapidly moved upstream. No longer are issuers solely looking for seed capital. Companies in the early stage and growth phase are all tapping funding platforms as a means to raise capital.

Democratising Finance Platforms

The alternative finance, or crowdfunding industry started with the three primary platform models: 1) reward or donation based models; 2) debt-based models; and 3) equity models. More recently however, given the industry’s ability to successfully challenge more traditional institutions, there has been a number of newer entrants to the market. They are designed to compliment the existing players and include liquidity and exit based models, real asset models and wealth management models.

In essence, over time, one would expect a broad swath of financial services currently carried out at bricks and mortar institutions to transition to alternative models as business and cultural support is gained. This growth will more than likely mean the market will stratify leading to niche players before an eventual shakeout occurs.

With its roots in donation and reward-based crowdfunding, alternative finance began as a seed-stage endeavour.

ALTERNATIVE FINANCE ADDRESSABLE MARKET OPPORTUNITY1

LENDING IS A $1.7TN AVAILABLE MARKET1

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Since “Star Citizen,” the video game, initially raised $6Mn on Kickstarter and CIG simultaneously in 2012, donations have continued to come from nearly 750,000 ordinary fans at a steady pace of $1-2 million per month. The end result, one of the largest reward crowdfunded project to date at $52Mn. The pledges have ranged in size from $36 – 18k. In return, those making donations get access to special game features, access to unfinished game versions and other merchandise.

Compared to traditional financing, it appears customers, or “fans,” like having input in a finished product. Through their donations, they have a say in development, resulting in a more marketable finished product.

STAR CITIZEN

P2P/Marketplace Lending As it stands, debt-based alternative funding appears more popular with more mature and well-established SME’s, many of whom prefer the cost benefits of an alternative-funding model. Currently, the largest debt-based players include Funding Circle, Lending Club, and Prosper. As evidenced by Lending Club’s recent IPO, this sector of lending continues to gain traction on both the consumer and commercial side. This includes more than $9.2Bn of loans issued by Lending Club and $1Bn issued by Funding Circle. Morgan Stanley estimates that the P2P lending market, which it says is a “misnomer” because of increased institutional activity in the space, will be worth $290Bn in five years12.

As the lending market matures and grows further, drawing in more institutional money such as from pension funds, we expect to see increasing importance placed on good due diligence. This pressure is also likely to come from regulators as the platforms handle larger amounts of capital and appear in the news more.


PROJECTED CROWDFUNDING MARKET GROWTH IN EUROPE4,5

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GLOBAL CROWDFUNDING MARKET 20144,5

LENDING CLUB IPO

In early December, the peer-to-peer lender, Lending Club, debuted on the New York Stock exchange to strong investor support. On its first day of trading, valuation climbed north of $9Bn, putting it on par with much larger financial institutions by assets. While this is an accomplishment in and of itself for Lending Club, it also serves as a sign that alternative finance has arrived to the mainstream.

Ultimately, it remains to be seen if Lending Club’s goal of transforming the entire banking system from a transparency and efficiency perspective comes to pass, but its IPO certainly added credibility to its cause and the greater cause of alternative finance.

Equity Crowdfunding Equity Crowdfunding has been on the rise for some years, with the UK leading the charge. Other countries, like Australia and New Zealand also made early regulatory moves in the area. Both the US and UK began discussing crowdfunding rules in 2010, but the UK has been faster in allowing broad public access. In 2013, with the passing of the JOBS Act in the United States, equity crowdfunding was made available to accredited investors. Numerous platforms have emerged to serve this market segment and there is now an increasing array of companies at various stages of the funding cycle and operating different business models. These include businesses in the growth equity, private placement, M&A, secondary, and wealth management markets. These platforms are now able to provide a holistic solution for businesses at all stages of the funding cycle. Equity crowdfunding models provide young businesses with a platform that allows them to reach a wide range of investors.


UK MARKET BY TYPE OF PLATFORM 20144,5

UK AVERAGE GROWTH RATE BY TYPE OF PLATFORMS 2012-20144,5

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What are issuers looking for from crowdfunding providers? What are the key value propositions? Issuers are looking for market appeal and validation. They need crowdfunding providers that can provide them with tools to refine their offerings so they can present them in a manner that is appealing to a large number of investors who may be interested in their companies. Value propositions such as business planning and analysis solutions, document hosting and sharing capabilities, and social media integration methods are vital to accomplish this task.

What has been the feedback from the angel and VC market on your platform? Are there any features you are keen to add, or modify, based on the feedback? Angels and VC’s want the ability to quickly and efficiently screen deal flow. Our system is designed so deals are categorised by automated, unbiased, and patent protected indicators. Angels and VC’s can see a rating of each deal based on dozens of attributes so they can quickly find the ones that meet their investment criteria. They are also provided with data regarding progress towards a company’s funding goal which includes pre-money valuation, funding raised so far, a percentage of how much ownership is for sale, current funding commitments, and funding raised in the past. All investors on our platform can also request any documents that pertain to an issuer’s fundraise at any time. This includes the results from our Enterprise Analyzer software which highlights abnormalities in the company’s business plan, benchmarks the company against its peers within its industry, and provides a host of other financial analytics presented in a standardised format.

What are the current liquidity characteristics of the equity crowdfunding market? How do you see this evolving over the coming months and years? There currently are not any liquidity characteristics of the equity crowdfunding market in the US. Some current regulations require a holding of securities purchased from private placements. Investors can be required to warrant they are not investing for trading purposes, so investments made through crowdfunding are considered long term by many. New regulations, however, may reduce transfer restrictions, which will lead to a general movement towards a secondary market. Companies such as WealthForge have taken great steps towards liquidity by working with CUSIP Global Services to create a standardised database for private investments by issuing unique alphanumeric codes to private securities sold within the crowdfunding industry.

Platform: Equity Crowdfunding Country: United States

Founded: 2005 Funding provided to date: US$330Mn+

EQUITYNETPARTNER CONTRIBUTION

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What are issuers looking for from crowdfunding providers? What are the key value propositions?Through crowdfunding campaigns, issuers are looking to increase brand awareness, accelerate global fundraising and create communities that can help them to grow their business. Crowdfunding campaigns bring a lot of visibility (press, events and online marketing) to companies. Furthermore, after the campaign finishes, companies can expect the investor community to continue to promote the company, buy the product, advise the entrepreneur and share with their network.

Our key value proposition is to help European SME’s to scale by making pan-European public placement affordable. We are headquartered in Belgium but we operate across the EU and are currently raising funds for French, German, Belgian and Dutch companies.

What are the characteristics of the investors you are, or expect to, work most closely with? We have 3 different types of investors: • Unaccredited investors, who invest on average €700 per transaction. • Business Angels and sophisticated investors who invest an average of €45k per transaction. • VC Funds who invest up to €200k in a deal.

What has been the feedback from the angel and VC market on your platform? Angel and VC’s investors like the fact that MyMicroInvest publishes an information memorandum or prospectus for each new transaction on the platform. Professional investors want to leverage their investment alongside the crowd, who validate the company concept/offer and also like that companies can capitalise on their community to promote the business in the long term. MyMicroInvest offers a simple and efficient crowdfunding solution to issuers by pooling all crowd investors in one single investment vehicle. The simplicity of the structure, whereby all crowd investors are pooled into our investment vehicle instead of investing directly in the target company is an attractive feature.

What do issuers see as the main benefit of listing on your platform? MyMicroInvest actively promotes each company by doing lots of offline and online marketing such as live crowdfunding events. We also have partnerships with major banks such as BNP Paribas, Fortis and KeyTrade Bank. Furthermore, we can help issuers to connect with sophisticated investors such as Angels and VC’s.

What are the current liquidity characteristics of the equity crowdfunding market? How do you see this evolving over the coming months and years? The current liquidity of the equity crowdfunding market is low even though our investors can transfer his/her share(s) to a third party. We believe this situation will quickly evolve since stock markets are willing to list our titles on their market.

Platform: Lending and Equity Crowdfunding Country: Belgium, EU

Founded: 2011 Funding provided to date: €10Mn

PARTNER CONTRIBUTION

MYMICROINVEST

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Over the past five to ten years the landscape for alternative investing has changed greatly due to technology. Crowdfunding platforms have facilitated a massive influx of capital to early stage/seed stage companies including technology, real estate and everything in between. Traditionally, founders had to approach individual venture capital firms, angel associations and other institutional sources one at a time and wait for a response regarding either the investment size or valuation. What we have successfully done at Onevest is not only enable entrepreneurs to go out and raise money through the traditional sources as mentioned above, but employ fundraising tactics such as equity crowdfunding. At Onevest we do not act as a replacement but as a supplement to their fundraising efforts. Technology has enabled entrepreneurs to reach out to a wider audience in a shorter amount of time to not only showcase their product but to also raise funds.

Issuers look for a platform where they can successfully meet or exceed their fundraising goals. They look to us to perfect their pitch and to understand the general investing landscape. In regards to key value propositions, when it comes to fundraising, the CEO or co-founder has one of two choices, they can either continue to run their business, or go out for 6-9 months and exclusively focus on fundraising. It is near impossible to do both simultaneously and that is why we see such a large value proposition as an equity crowdfunding platform. Digital investment services are not new, there are companies such as, Charles Schwab, E*trade, Fidelity and basic brokerages that offered their services online. What Onevest is doing is democratising private placement capital. What that means is that founders are able to go online and start fundraising ideas. Individuals out there, as long as they are accredited investors or more recently non-accredited with the passing of Title IV, can now participate in those companies that they have been reading about over the past 10-15 years, that have been going public and not been able to participate until they are publicly traded. Onevest focuses primarily on tech enabled companies but there are other crowdfunding platforms that fundraise exclusively for real estate, biotech and other company types. We chose tech companies because we have an advisory base that are well known amongst the early stage investment community and we are therefore able to execute a vigorous due diligence process on each company.

We have seen investors all across the field from doctors and lawyers to small business owners, former entrepreneurs and real estate developers. Furthermore, the investors that commit the highest level of capital seem to be very knowledgeable about the specific sector that they are investing in. Angel groups often look to us for the due diligence. Every company has a full due diligence report, financial records, pitch deck and all necessary collateral for an angel or an angel group to make an educated decision on whether or not he or she will make an investment into that company. Regarding VC firms, we have been able to form strong partnerships with them due to our vigorous due diligence process. We are able to provide both groups with quality deal flow that they would otherwise not be able to filter through any process.


Founded: 2010

ONEVESTPARTNER CONTRIBUTION

37

We recently spoke to Raizers a Pan-European equity crowdfunding platform located across France, Denmark, Switzerland, and with intentions to spread throughout Europe. They help companies to raise between €50k to 1m.

Raizers is the only French crowdfunding platform with a European dimension, with offices located in Paris (France), Lausanne (Switzerland) and in Copenhagen (Denmark). The issuers benefit from this cross-country community through the global vision they have and the help they can give while expanding abroad.

Most of their investors tend to already be consumers of a product, or will be post-investment and act as brand ambassadors who can provide the companies with important feedback. In France a lot of their investors are attracted because of the tax exemptions for equity investors, while debt investors tend to purely be looking for higher returns than other avenues.

VC and Angels are also important to Raizers, who solicit them at the beginning of the round, as the crowd is more likely to invest if the round is subscribed to already. As with many other platforms, Raizers noticed that it was easier to incentivise the crowd to invest when 30% of the financing objective was already realised.

Liquidity still remains a concern for the equity crowdfunding market in Europe, as it does for most people in the sector. Raizers tends do deal with this through tag-along and drag-along clauses, or even calls integrated into the shareholders agreement.

Platform: Equity Crowdfunding Country: France, Switzerland, Denmark

Founded: 2014

RAIZERSPARTNER CONTRIBUTION

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Previously, we talked with Snowball Effect, a crowdfunding platform based in New Zealand where securities law has been overhauled and a new equity crowdfunding framework was installed in 2014. Now, Kiwi companies can raise up to NZD 2Mn publicly over a rolling twelve month period.

Snowball Effect was one of the first equity crowdfunding platforms in New Zealand to be granted a license in July 2014, and the industry certainly remains in its infancy. However, success has already come for Snowball Effect. To date, issuers have raised in excess of NZD8Mn at an almost 100% success rate via Snowball Effect’s platform. The largest was Invivo, one of New Zealand’s fastest growing wine brands, which raised NZD2,000,000 (maximum possible in New Zealand) through Snowball Effect.

Snowball Effect’s strategy is to showcase a range of companies from New Zealand to test and grow the awareness of equity crowdfunding in its corner of the globe. Other successful raises to date through Snowball Effect include Renaissance Brewing (beverage sector), The Patriarch (first major feature film in the world to be funded through equity crowdfunding), Carbonscape (cleantech sector), Aeronavics (advanced aerial solutions) and Breathe Easy (pharmaceutical company), Red Witch (guitar and bass effects pedals company) and Punakaiki Fund (invests in early/growth stage NZ businesses). Snowball Effect has also raised funds successfully for two private offers and expects private offers to increase over the next 12 months.

Similar to global peers, Snowball Effect takes a multifaceted approach to evaluating issuer applications. Selection criteria includes: (1) performance, (2) markets and product advantage, (3) growth, (4) capability, (5) governance, (6) financials, (7) legal, and (8) pre-committed funds/networks. In its words, companies looking for growth or expansion capital are in its sweet spot, as they can benefit best from the brand exposure and support brought by a public equity crowdfunding offer.

The Executive Director of CarbonScape provided his feedback on the process of raising funding through Snowball Effect:

“Equity crowdfunding has been an absolute life saver for our small start-up CarbonScape Ltd. Despite two distinguished international awards for our technology we could not escape the narrow limits of New Zealand's "eligible investor" criteria. In one of their best moves the Government changed all that with the April 2014 Financial Markets Conduct Act. Suddenly there are platforms like Snowball Effect acknowledging the right and maturity of ordinary mum and dad Kiwis to make their own assessments of commercial risk in equity investments. 207 mostly New Zealanders invested an average of $3,850 and the company raised $764,302, well above our $400,000 target.”

Platform: Equity Crowdfunding Country: New Zealand

Founded: 2012 Funding provided to date: NZD8Mn+


SNOWBALL EFFECT

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Co Investment Models More recently hybrid, co-investment models focused on early stage issuers have emerged, pioneered by OurCrowd and VentureFounders. These platforms allow investors to co-invest alongside the co-investment funds they manage and more traditional VC investment and differentiate themselves by their level of due diligence and investment management expertise.

OurCrowd, for example, have channelled around $130Mn into 70 companies with plans to invest another $100Mn by the end of 2015. They have a 50 person due diligence team that vets deal before they are presented to investors and invest between 5-15% of the funding in every deal13. They recently invested in ReWalk Robotics, an exoskeleton company that helps disabled people to walk, who having listed recently, have a market cap of around $160Mn.

Investor-Led/Syndicate Models Investor-led platforms, adopted by AngelList in the US and SyndicateRoom in the UK form syndicates around accredited lead investors, whereby the lead investor must invest their own money, negotiate the terms and then invite other investors to join under those same terms, (lead investors also carry out the diligence which provides comfort to the syndicate, this model has resulted in investment from non-traditional sources of private company funding). The idea of both platforms is to open up the deals that the top investors are investing in to the online community and continues our theme of broadening the scope of the private market.

This platform model gives other investors peace of mind by investing alongside professional investors, with the platforms benefiting by taking a slice of the carry on deal. This emerging model also highlights the increasingly collaborative relationship that exists between alternative finance and the traditional investing community. Rather than trying to replace the traditional VC-led funding paradigm, alternative finance is developing a symbiotic and mutually beneficial relationship with the angel and VC community.

Niche Platforms The increasing proliferation of platforms in recent times has meant that a number of new entrants to the market are choosing to specifically target niche sectors. This has been the case with Trillion Fund, who concentrate on clean-tech investment opportunities; AgFunder, who follow a syndicated investment model and operate in the $6.4Tn Food and Agriculture industry and TradeUp, who focus on export driven companies.

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Agriculture is a $6.4Tn market employing roughly 1.3Bn people around the world. It has outperformed all other sectors but one over the past 15 years, yet there are few avenues for investors to access this asset class and few investors have exposure to agriculture in their portfolio. One reason it’s been so difficult for investors to access agricultural investments is because the industry is highly fragmented. Current investment figures indicate that agriculture needs $200Bn in annual investment in growth and innovation just to keep pace. The lack of funding and cohesiveness across the agriculture industry presents a serious problem because current agricultural production capacity must grow by as much as 70 percent by 2050 in order to supply a global population of over 9 billion people.

The next wave of agriculture will look fundamentally different due to the new technologies now available in this sector, like drones, autonomous vehicles, indoor agriculture operations, and more. Investors looking for exposure to long term trends like population growth, protein consumption, and climate change are increasingly searching for opportunities in pure-play agriculture or in agriculture technology companies.

AgFunder seeks to play a central role in facilitating the funding, access to investment, and ecosystem development for the industry as it enters this next generation. The company has directed nearly $20M in investment into agriculture and agtech companies, with that figure set to double this year.

To help facilitate investment, equity crowdfunding - and technology generally - is key to enabling investment on a global scale. First, crowdfunding offers important procedural benefits. One of the most obvious is the reduction in time that it typically takes to raise funding. A crowdfunding platform offers a much faster way to attract and secure capital. The costs and expenses associated with running a crowdfunding campaign are often significantly less expensive than pursuing funding through a traditional channel. For investors, it offers a shorter investment cycle by providing access to curated deals, transparency, centralising company information and documentation, and enabling electronic investment.

A crowdfunding platform with vertical focus like AgFunder’s allows both companies and investors to self-select around a particular topic and for AgFunder to provide added value and expertise for both parties. Issuers target a curated list of investors who possess industry knowledge, domain expertise, or are simply interested in investing in the space. All of this takes place on a platform that removes key geographical constraints, magnifying the community exponentially.

Currently, AgFunder has over 5,500 registered members. Roughly 1,300 of those members are accredited investors, with over 45% of them coming from venture capital firms, family offices, private equity firms, and even sovereign wealth funds. In addition to pure fundraising functions, AgFunder has also established and continues to cultivate an ecosystem for investment in agriculture. Through its affiliate news site AgFunderNews, investors, partners, experts, corporates, and media outlets interested in food and agriculture technology can learn about new innovations, industry developments, and funding news.

Founded: 2012 Funding provided to date: $20Mn


AGFUNDER

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How have you leveraged crowdfunding in the angel investment market? Equity crowdfunding is the platform that allows us to do our business. It enables us to get our research across to an international community of investors, and provide them with everything they need in order to make intelligent investment decisions in Israeli startups.

What have been the keys to the success of your business model? The key to our model is the alignment of interests between ourselves, our investors, and the lead angel investors we have partnered with. Investing alongside local lead angels with a proven track record and skin in the game, international investors can be assured that they are gaining access to the most exclusive deals the market has to offer and coming in on terms these angels have negotiated for themselves.

What has been the feedback from the angel and VC market on your platform? We are viewed as complementary partners. Angel investing as an industry is based on syndication, and VC’s and angels alike want to invest alongside added value partners they trust and like to do business with. iAngels allows the VC community in Israel to close rounds faster and more efficiently by bringing capital and insight from abroad.

What is the value proposition of performing thorough due diligence on the behalf of investors? Angel investing is not the kind of business where you can simply invest passively. Investors need to be selective, diversify, and conduct their own due diligence. Most people, however, do not have the time to make it their full time job, especially in a foreign country. This is what we provide and we love what we do. Our investment team works day and night in order to provide our investors with the best deal flow and investment experience.

What are the characteristics of investors that are most likely to use your platform? Our investors are sophisticated business people and see us as their investment arm in Israel.

What deals do you invest in? Mobile, enterprise software, fintech, SaaS, consumer applications, big data, robotics.

Founded: 2013 Platform: Equity Crowdfunding Country: Israel

IANGELS

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Enabling the crowd to co-invest with professional investors is a game-changer for the angel investment market and a clear sign of how much the industry is maturing. As the driving force behind the initiative in the UK, equity crowdfunding platform SyndicateRoom is uniquely positioned to comment on both the benefits for the crowd and the response from angels and VC’s.

SyndicateRoom’s approach differs from the more traditional company-led equity crowdfunding model by putting the emphasis firmly on investors. Instead of the investment-seeking company deciding its own valuation and setting the terms of investment, under the investor-led model, a professional investor negotiates the deal and the crowd is then able to co-invest alongside them under the same economic terms.

The validation of having professional investors carrying out their own due diligence first and investing large sums of money into the deal is the key differentiator with the investor-led model. As it’s a more curated approach, poorer quality investment opportunities are weeded out - a case of quality over quantity. This and the fact that the crowd can invest just £1,000 alongside professionals investing much larger sums have been the keys to the success of SyndicateRoom’s business model.

The SyndicateRoom ’crowd’ tend to be sophisticated and high net worth investors investing an average of £15,000 into each round. This is well above the amounts that the general equity crowdfunding investor typically invests. However, the platform also has many members investing towards the lower end of the scale as they know that whether they invest £1,000 or £1Mn they will still get the same class of shares and same share price as the professional investor.

One of the key attractions of SyndicateRoom for issuers is its members. Their endorsement of the investor-led model has meant that SyndicateRoom has successfully closed over 80% of all the rounds it has listed. Issuers are also reassured by knowing that they are getting sophisticated investors that have the ability to follow their money when the next funding round comes.

In addition, for more sophisticated deals, it is important for issuers to have an audience that understands complex investment opportunities. With 33% investments in life sciences, 25% in engineering and 25% in B2B, SyndicateRoom members clearly have an understanding and attraction for sophisticated deals. The majority of deal sizes on the platform are in the £250k to £2Mn range.

SyndicateRoom works with over 30 angel networks throughout the UK, helping them to leverage their investments. Feedback from the angel and VC market about the platform has been excellent. Some VC’s have requested the addition of reporting tools that comply with their internal processes but as each has their own differing set of rules and requirements this can become too challenging.

Judging by the response from both the crowd and the angel and VC market thus far, it appears that the investor-led model of equity crowdfunding is set to go from strength to strength.

Founded: 2012 Funding provided to date: £29Mn+

Platform: Equity Crowdfunding Country: United Kingdom

SYNDICATEROOM

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VentureFounders was established with the aim of bringing a curated offering of venture capital and angel style investments to investors in an efficient and cost-effective way. We launched in 2014 to offer a more bespoke and professional service, both to businesses looking for finance through crowdfunding, and to investors wanting to diversify their investment portfolio.

The team’s extensive experience in corporate finance, private equity, deal structuring and start-ups means we are well placed to identify the businesses that meet our criteria i.e. those with potential for growth and profit, a sustainable competitive advantage, a clear path to commercialisation, a strong management team and viable monetisation options. Our team is complemented by a Senior Advisor panel of industry leading experts and entrepreneurs including Justin Urquhart Stewart, Founder of Seven Investment Management and Martin McCourt the ex CEO of Dyson.

VentureFounders is much more than a crowdfunding platform. We offer long-term advisory services and partnership to the businesses seeking funding and provide access to a curated range of well-structured early stage and growth capital opportunities for investors. We screen all of the investment opportunities on our platform, conducting detailed due diligence before presenting to our investor base. All of this vital information is presented on our website for investors to see.

We believe that the role of crowdfunding shouldn’t end just because the investment round has completed. We create long-lasting relationships with our investment businesses, checking in throughout their growth cycle, often taking a board observer seat and providing regular updates to shareholders and helping to maximise returns on their behalf.

VentureFounders will typically work with sophisticated and High Net Worth investors who have already established a diverse portfolio of investments and are interested in angel style investments at a level that is much more accessible and affordable. Our entry-level investment is £1,000. The reason that we set this minimum is that we believe this is an appropriate minimum threshold for more serious investors looking to self-select their own portfolio whilst also indicating a suitable level of risk appetite.

Our current investors are a mix of backgrounds but in general there is a South East and London bias. The profile of investors who may find our platform is right for them will range from highflying city professionals, through to the adventurous retiree, through to successful entrepreneurs seeking to support the next generation. We expect to appeal to any HNW investor from across the UK and possibly in to Europe in the coming years.

VentureFounders is aimed at growing businesses that have already demonstrated early signs of strong potential. The company must be UK-based and in terms of deal size, looking to raise between £250,000 and £2 million. We are open to any industry sectors. Typically between one and three years old, they will be up and running with a strong management team in place and a detailed business plan. The businesses that VentureFounders works with tend to value the in-depth support and guidance throughout the fundraise process as well as access to a mix of supportive investors and senior advisors who can open doors and introduce valuable networks.

Founded: 2013 Funding provided to date: £9Mn+

Platform: Equity Crowdfunding Country: United Kingdom

VENTUREFOUNDERS

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Bankless 24 is the first crowdfunding platform in Germany for small to medium sized businesses. We caught up with them to discuss their business model, which is unique in that they offer a mezzanine product. The reason for this is that the funding gap in Germany for growth financing means companies are battling a declining equity ratio, which impacts their credit score and the mezzanine product is designed to solve this issue.

Their investor base is composed mainly of private investors, although more recently institutional investors, such as family offices, have started to invest. For Bankless 24 to reach their transaction targets of €1 - 5 Mn, these institutional investors are needed.

Founded: 2012 Platform: Equity Crowdfunding Country: Germany

BANKLESS 24


Founded: 2014 Platform: Equity Crowdfunding Country: United States

TRADEUP

TradeUp are taking a unique approach to crowdfunding by focusing on export driven enterprises. They noted that investors in the US are slowly becoming alert to the fact that companies must become globally minded earlier in their life. With technology companies now being ‘born global,’ record numbers of mid sized businesses are looking towards international expansion in order to tap new revenue sources. As a comparison, European companies that operate in comparatively smaller countries have always had to think about international expansion from a very early stage in order to maintain growth.

The reason for this focus is down to the fact that leading research all points to exporters outperforming peers who are domestically focused. Exporters tend to employ better, more productive staff who are, as a result better paid. TradeUp cite these businesses as out-performers in terms of ‘revenue, productivity and stability’ and ‘stand out assets offering a unique portfolio diversification strategy.’

As crowdfunding platforms work at reducing the funding gap that exists, TradeUp is targeting funding at least 200 US companies in the next two years. Feedback from issuers on the platform has been positive with value added activities such as a list of best-fit investors, contacts for exporting and access to broker dealer services all being well received.

TradeUp, is a Grow VC Group Company.

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Growth Capital Equity Platforms Out of the movement upstream by issuers, platforms focused on raising capital at the growth stage of the funding cycle are beginning to appear. Raising larger ticket sizes of between of $2-50Mn, players include ASSOB, OfferBoard and Healthios Xchange, who have raised $350Mn for clients and focus on investments in the health industry.

OfferBoard, has a wider scope and recently featured a Series B financing round from medical device company Atlas Spine which comes after previous financing of $8.5Mn via more traditional sources. Most of OfferBoard’s clients are traditional middle market firms and on average raise between $8–10Mn through the platform.

Private Placement Platforms Private placements have also started to move online. Ace Portal, Axial Ventures, which has secured $20Mn in funding, and Venovate are all disrupting the private placement market by providing platforms that connect family offices and high net worth individuals with opportunities to invest in hedge funds, PE funds, energy projects or other opportunities.

Venovate claims to have a total audience of 330,000 accounts totalling U$17Bn in assets, while the NYSE took a minority stake in ACE portal in 2013, signifying the potential this category has.

Alternative Assets Platforms Funding platforms ability to raise capital in a more efficient manner through better access to investors and their ability to disrupt traditional firms has led to the emergence of alternative investment platforms replicating the model. Firms such as Darc Matter, iCapital Network, and Palico are all bringing together wealthy investors and private equity funds through the use of technology.

iCapital Network is supported by placement agents from Credit Suisse and Blackrock and is opening up access for single investors to private equity funds, at lower costs and much lower qualifying amounts than would otherwise be possible at traditional banks. iCapital Network expected their aggregated qualified investor assets to reach $850Bn by the end of 2014.

Online M&A Platforms The Mergers and Acquisition market has also benefitted from technological innovation as companies such as Intralinks Dealnexus and DealGlobe bring dealmakers together from all parts of the world, streamlining and speeding up the deal making process. DealGlobe is a new platform specifically developed to connect European businesses with Chinese capital at a time when Chinese foreign investment is strong. While, Intralinks Dealnexus, arguably the largest online M&A platform, showcases deals from more than 3,300 investment banks and advisory firms.

In a recent study, 55% of the M&A professionals questioned confirmed they used online platforms to support the M&A process. We can only expect this figure to grow as Millennials start to move up traditional banking organisations.


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Platform: Online M&A Country: China and United Kingdom

Founded: 2013

DEALGLOBE

The majority of online M&A activities have been quite basic, offering little more than online promotion. Buying or selling businesses is complex, especially cross-border, requiring significant offline activities and as a result there have been very few genuinely executional platforms, meaning that until recently the M&A space for SME’s in particular has been relatively lightly affected by digital.

Addressing this was the inspiration for DealGlobe. Whilst businesses and sectors have similarities every business sale or investment strategy is individual and generally has numerous parties involved. Additionally, the procedural, regulatory or compliance requirements of markets are different. These factors mean that to create a truly end-to-end digital business model for M&A and capital raising, you need to combine both online and offline capabilities.

Our approach, therefore, has three key elements: • First, the online platform automates and deepens the more standard parts of the process, with a

proprietary algorithm to support business match making and analytics to assist with sector and individual business level decision-making, with the internet enabling global reach.

• Second we have a centralised infrastructure that drives product development as well as providing remote support for specific business situations – from specific analytics through to accessing global or local industry experts – a digitally enabled and scaled ‘virtual consultancy’.

• Third, we have Deal Partners, a global network of M&A professionals who provide the offline executional support with their local process & compliance knowledge.

Online platforms provide efficiency via a lower cost, by increasing the reach of dealmakers. This is valid intra-market (UK-UK) or region (EU-EU) but it also helps close the knowledge gap across regions (EU-China, EU – India..).

The core value proposition is in the fragmented and less developed SME marketplace, but the platform also compliments traditional investment banking, where the scalability and configurability gives users a choice of how to utilise the platform. Already many large organisations are engaged as corporate deal partners.

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What are issuers looking for from crowdfunding providers? What are the key value propositions? Issuers seek providers leveraging “offline” (one-on-one meetings) and state-of-the-art “online” technologies assisting with identifying, connecting, closing and managing investors post-close. Technology is critical for engagement (i.e. “matching” investors with companies via market sector/geographic proximity) and streamlining the investment process (evaluation and diligence of premium deal flow, accredited investor verification, eSignature, payment processing) making it easier to raise capital from alternative sources including accredited investors. However, given healthcare is still largely institutionally driven/funded, it is important for issuers to evaluate whether providers have access/connections to traditional forms of capital (venture capitalists) to meet overall capital needs (average pharma company raises over >$50Mn prior to approval).

Could you provide perspective on the healthcare investment market and the role HealthiosXchange is playing? Healthcare is one of the more challenging market sectors to raise capital online (vis-à-vis real estate or early-stage technology) given the industry’s capital intensity, inability to provide “yield,” and multitudes of risks including clinical, regulatory and commercial. Leading healthcare providers including HealthiosXchange assist companies from Seed to “Exit” raise capital directly from investors on a “no carry” basis. To date, 3,000+ emerging growth company executives, investment professionals, strategic buyers, and accredited investors have joined HealthiosXchange. Over 600 companies actively participate including centralising their investor relations activities, connecting with HealthiosXchange members (friend, follow message, share), and raising capital via 506 (b) and 506 (c) – general solicitation.

What are the characteristics of the investors you are, or expect to, work most closely with? Many HealthiosXchange investors are former pharmaceutical, biotech, healthcare services, and medical device executives. We encourage issuers to connect with these investors and their respective networks (i.e. former work colleagues) via “Messaging” “Friending,” persuading them to “Follow” company pages and receive catalyst updates. Similar to angel networks/groups, companies build “virtual” networks of followers/investors who can work together to perform company due diligence. For investors without the background or ability to do this, many companies provide attractive investment minimums so investors can diversify their private equity allocation across a number of companies.

What has been the feedback from the angel and VC market on your platform? The feedback has been mostly positive. Institutional capital sources are intrigued by FinTECH (Financial Technology) innovation and are participating including building relationships with alternative sources of capital (family offices, accredited investors), and sourcing premium deal flow. 600 investment professionals (venture capitalist) are currently members of HealthiosXchange.

What are the current liquidity characteristics of the equity crowdfunding market? Most attempts at forming secondary markets (i.e. SecondMarket) have been challenging given the overall market is fairly small (estimated to be $35BLN in 2015) compared to the >$1Tn in Reg D industry. Over time we expect to see more established secondary markets and integration with primary markets (Initial Public Offerings, IPO’s) whereby companies can readily access liquidity pathways as evidenced by HealthiosXchange’s recent partnership with Clearbridge Accelerator and SGX launching Capbridge.

Founded: 2010 Funding provided to date: $350Mn+


HEALTHIOSXCHANGE

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Liquidity Platforms Until recently, a major drawback of investing in the private markets has been the inherent lack of liquidity and opportunity to exit for both founders and investors. Vitally important for the ecosystem to scale, this need is being addressed by companies such as The Founders Club and Second Market, who both provide secondary markets for private company shares to be traded.

The introduction of this type of platform has allowed companies, such as Facebook, whose shares traded pre IPO on Secondmarket, to stay private longer and delay a public listing. After having some problems, Secondmarket, who last year handled around $1.5Bn in secondaries, recently launched a transfer facility that allows companies and their employees to sell shares in a more controlled manner, avoiding the need for traditional brokers.

The importance of this new market should not be understated. Liquidity is always of concern to investors, and those in Venture Capital are no different. The increased freedom with which VC’s and company employees can exit equity positions

should stimulate greater investment in the private sector as a whole. The ability to exit a position on demand increases the flexibility of any investment and could be seen to lower risk. While the secondary market for private shares is still very much emerging, it does not seem a stretch of the imagination to envision liquid private sector share markets not fundamentally unlike those that currently exist for public companies.

Wealth Management Platforms New online wealth management solutions provide investors with cost effective access to discretionary asset management. Wealth management has traditionally been a closed industry, available to those investors with large amounts of disposable income, but that is starting to change. Firms such as Nutmeg and Wealthfront are making wealth management available to larger amounts of people via lower cost offerings. For as little as $5k they will manage investors’ money and charge comparatively low rates of around 0.25% of assets, with no commission fees. Wealthfront, the largest player has amassed $2.2Bn in assets under management.

AUM IN PASSIVE MUTUAL FUNDS1ADVISORY FEES, 20141

Though “crowdfunding” currently stands as the descriptor of choice for this segment of the alternative finance market, over time we believe these platforms should be thought of more as digital investment platforms to reflect an increasing presence of institutional and accredited investors. This will become increasingly true as deal sizes move upstream and away from the seed stage. Market infrastructure is currently being developed so that the sector can support larger transaction sizes. Moreover, as funding moves online, discovery of investment opportunities will become more centralised. Comparability across opportunities also becomes easier as the data deficit currently found in the private market is reduced.

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Crowdfundraiser, a company that operates across the crowdfunding sphere recently spoke to us about the landscape ahead for a liquid alternative finance market. It operates a unique and interesting business model and works with companies who want to offer investors the added protection of a liquid exit. Although not wholly focused on crowdfunding industry, it recognises the potential for the market when Title III opens up the sector.

As with other platforms, it sees the core drivers of the industry as the increased access for investors into private investments and the fact that crowdfunding facilitates capital flows to companies that may otherwise not be ‘fit for traditional venture capital.’

In terms of their liquidity offering, they have found that it is actually start-ups, who are looking to provide added benefits to investors at a low cost, that are most interested in their services. Investors see the benefits of being able to recoup some of their investment, but recognise it takes time to exit.

Going forwards and as the crowdfunding market opens up in the US, the expectation is that there will be more public offerings such as PIPE (private placement in public equity) deals, making way for a more liquid market where private shares can be traded openly rather than OTC.

For this secondary market to transpire regulation will play an important role. The key here is to keep costs down, especially when considering most of the issuers are cash bound start-ups. Crowdfundraiser noted that with initial offering costs at around $40k and the on going costs of reporting around $20k the costs themselves are not prohibitive and it is more about company owners being able to see the benefit that liquidity affords their investors.

Platform: Crowdfunding Country: United States

CROWDFUNDRAISER

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DATA & MARKETPLACES

This importance of data to investing is exhibited by the current size of Goldman Sachs’ technology team, which at 9,199 engineers is significantly more than the likes of Facebook, Twitter and LinkedIn

“

Data Traditionally, private company investment has remained a closely guarded market, accessible only to a small number of high net worth individuals with access to proprietary personal networks. As alternative finance opens up the marketplace to a wider number of investors, democratising finance, so too will it enable investors to make decisions in a more systematic way.

Decision making in the private market has been largely focused around intuition or ‘gut instinct,’ the result of an inherent lack of data, brought about by the guarded nature of the industry. But, as the market starts to transition online and it becomes easier to collect and analyse large quantities of data relating to investments and investor behaviour, it in turn means institutions and individuals can analyse that data, performing research and due diligence in a more scientific manner, paving the way for a systematic approach to private company investment.

Big data is at the core of everything Netflix do and with 62Mn subscribers across 50 countries, they have a truly global view and valuable access to information on user behaviour.

Many of their key business decisions are backed by the data they collect, allowing executives to de-risk the multi million-dollar investment needed to produce a new TV shows or movie.

In the case of ‘House of Cards,’ the popular TV show, user data showed that Kevin Spacey and Robin Wright were well received by users, David Fincher’s films (which include ‘The Social Network’ and ‘Fight Club’) were popular, while users also favoured political dramas.

NETFLIX

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Democratising Finance Data & Marketplaces

This transition towards a data driven approach to decision-making was seen in the public investment markets (as well as in a host of other industries) in the 1980’s. Data providers such as Bloomberg created tools to better track, monitor and analyse large amounts of information quickly, allowing users to make more informed and more accurate decisions. These data providers helped to open up the market beyond those who invested via index funds and discretionary money managers to the wider public.

This importance of data to investing is exhibited by the current size of Goldman Sachs’ technology team, which at 9,199 engineers is significantly more than the likes of Facebook, Twitter and LinkedIn.

As it stands the private investment market is someway behind and although there remains significant room for innovation in this sector, recently, there have been a number of new entrants to the market looking to address this need for data. By monitoring investor and company behaviour, these players aim to uncover trends and provide insights to clients ranging from Banks and VC’s to corporate development teams. Decision makers need to be aware that, with the market still in its infancy, the quality of data will vary significantly and while platforms like Crunchbase are a good source of top line company data, they are self written and can therefore be misleading.

CB Insights are one of the key players in this category and provide high quality data on venture capital deals, publishing reports and analysis to a wide range of clients including Cisco, Salesforce, Castrol and a number of top tier VC’s.

Preqin are another major player in this sector and although originally focused on the private equity

market, it has now expanded to encompass alternative assets as a whole. Its 24,000 clients, across 94 countries use the tools they provide to regularly connect with potential investors, widening their fundraising market and expanding the reach of the asset class as a whole.

Marketplaces (Aggregation) The number of alternative investment platforms has significantly increased over the last few years. This poses challenges to investors of how to navigate such a large number of platforms to find the right investment opportunity. Coupled with the increasing geographical spread of these platforms, and the varying stages of the funding cycle that they operate at, the alternative finance sector is becoming an increasingly complex market for investors.

Similar to what has occurred in other markets, such as ad-tech, since the rise of the internet, traditional finance looks poised to move to onl ine marketplaces that reduce these complexities. On the equity side of alternative finance specifically, marketplaces help promote discovery of opportunities, bringing investment opportunities across geographies, sectors and company types to one centralised location.

Debt focused crowdfunding marketplaces are more focused on efficiency due to higher volumes and higher traditional borrowing costs, and are someway in advance of their equity focused counterparts.

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Around 2001, ad networks began to facilitate the sale of ads between publishers and advertisers. But, the process lacked transparency, so ad exchanges and real-time bidding started to emerge.

This technology helped the advertisers to drive more sales, while allowing consumers to discover more products, thus creating an ecosystem that adds value to both sides. The rise of ad-tech platforms has introduced transparency and efficiency, allowing advertisers to improve the performance of their digital campaigns and publishers to buy an audience at a fair market price.

AD-TECH

ORCHARD PLATFORM

Orchard is a financial technology company that links investors with peer-to-peer platforms, providing institutions with data-driven loan acquisitions and operational efficiency. Aimed at the institutional investment market, it facilitates the flow of capital from many leading investment institutions including hedge funds, pension funds and investment banks to the loan origination platforms.

By utilising technology, it allows originators to scale their business while helping institutions to analyse large amounts of data and streamline back office procedures, helping the alternative lending market to move away from its consumer origins and opening up the asset class to institutional investors for the first time.

Orchard has been backed by veteran bankers, such as Vikram Pandit (former Citigroup chief executive) and John Mack (former Morgan Stanley chief executive) alongside institutional investors and recently raised a $12Mn series A round.

Recently a single investor committed $1Bn in just 10 days to a single P2P platform via Orchard, testament to the increasing involvement that institutions have in this market. Furthermore, Orchard is constantly increasing the number of loan originators on the platform and the industries in which it operates is expanding.

CASE STUDIES

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DEALINDEX INDICESDemocratising Finance Data & Marketplaces

OUR CROWDFUNDING INDEX MEASURES COMPONENTS OF GROWTH, A 10-DAY MOVING AVERAGE PROVIDES ADDED CONTEXT

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DEALINDEX INDICESDemocratising Finance Data & Marketplaces

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SEGMENTAL ANALYSIS: MARKET SHARE BY SECTORS

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Market Share by Sectors (Amount Raised - Weekly) - International

Informa6on#Technology# Food#and#Drink# Life#Sciences# PlaGorms# Other# Transport# Health#Care# Consumer# Finance#

Alternative finance is set to fundamentally disrupt early stage investing. It will replace an old, inefficient process with one that leverages modern technology to seamlessly connect companies and investors. An avenue of capital is being established that will launch hundreds of thousands of ideas that may not otherwise have seen the light of day.

VC’s have typically outsourced the earliest stage to angel investors – revealing an opening for a better system. The historic problem with investing in the private markets has been the black hole in terms of data. How do investors ensure their capital is being deployed effectively – whether that be sourcing or evaluating deals, or monitoring them post investment?

The sheer volume of deals has created its own challenges, meaning the job of finding something of interest has become harder even while deals themselves have become vastly more accessible. Investors will therefore require a suite of tools to help them navigate this new world. Technology can help, making it easier to discover, filter and analyse opportunities on a global basis. The advent of scalable ratings systems will allow platforms to showcase the best deals.

There has always been risk associated with start-up investment, but this has been magnified as a result of varying levels of professionalism and experience. Until the regulatory culture keeps pace with the explosion of new business models, there will be some who are disadvantaged. Increased data collection – and due diligence – is key in helping to ensure that industry practices improve as the sector matures.

A decade ago, investor updates were less important because angels had fewer investments and often followed a ‘set it and forget it’ program. Today things are much more active, with compressed timelines, rapid iteration and fierce competition – which means that regular updates during the early stages are critical. The quality and consistency of updates is a clear indicator of a company’s progress and likely success.

Our platform provides increased visibility – eventually making it possible to track the real-time performance of investments with high quality financial and non-financial reporting. We aim to address some of the key risks associated with investing by unifying networks and financial expertise with technology.

“Moving towards a hybrid financial system”

Director, Product & Business Development, DealIndexTOM WALKER

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INFASTRUCTURE

As with any emerging market, infrastructure plays a vital role in the smooth running of the ecosystem. As the core players grow in size and their needs become more complex, so too does the need for a support system

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Democratising Finance Infrastructure

As with any emerging market, infrastructure plays a vital role in the smooth running of the ecosystem. As the core players grow in size and their needs become more complex, so too does the need for a support system. This support system must be made up of providers that offer complimentary services that allow the core players to focus on their primary business functions. For the market to scale effectively it is important that there is a strong infrastructure already in place.

The majority of alternative finance issuers are still raising small amounts of capital, meaning both they and the platforms who facilitate the financing are often resource bound when it comes to support providers services. But, as the market grows and starts to move upstream, there have been a number of new support providers coming to market, diversifying the existing infrastructure.

Diligence, Execution and Portfolio and Risk Management Support providers have recognised the trend towards data that is emerging and as such, there are now a number of players providing data engines, business intelligence, and sentiment analysis amongst other things. One such company is PeerIQ, a financial information services company focusing on the P2P lending market that recently raised a $6Mn seed round. It provides institutions with a credit risk analytics platform, allowing them to manage risk effectively and thus invest at scale.

As the number of issuers grows, so too does the need for business valuation tools. Platforms can now enable companies to quickly and cost effectively reach a valuation by answering simple

questions online and compliment the online equity crowdfunding and M&A platforms. It is often hard to place valuations on SME’s at the early stages where there is a lack of revenue but both Bizequity, which recently raised £6Mn, and Equidam are tackling this problem using proprietary algorithms. They also enable businesses to track their progress over time.

Another platform disrupting the private investment market is eShares, which was founded in 2012 to solve the problems relating to the speed with which private company share certificates are distributed. It has grown out to compliment the existing platforms and service the increasing number of private company investors that alternative finance is enabling to enter the market. Along with electronic share certificates, it has created electronic share registries for private companies, investors and employees, replacing the traditional paper registry.

M&A platforms such as Rainmaker and Midaxo provide tools that help clients, who range from PE professionals through to corporations, run the highly complex M&A process. Midaxo’s cloud based software simplifies and speeds up the entire M&A lifecycle from deal sourcing to post deal integration while Rainmaker provides a similar deal flow management system, meaning that investors can not only source deals on online platforms but they can also manage the entire process online too.

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Equidam recently chatted to us about their business valuation tools and how it is helping companies during the fundraising process. Currently about 3,000 entrepreneurs use the platform, which has been designed to be user friendly and accessible for founders. At the moment, Equidam has 13 equity crowdfunding partners in Europe, the US, Canada and Australia that facilitate the investment in companies.

Core to any new businesses need is their ability to attract financing and Equidam is helping to facilitate this process for SME’s and start-ups by giving them the ability to manage and track their value over time and by providing a ‘clear roadmap for managing marketability.’ Providing a way for business owners to measure, track and grow value is the basis of the Equidam platform.

The valuation tools not only provide a basis with which to engage investors, they also provide legitimacy for actions in the M&A market, such as restructuring’s and employee stock plans. Feedback on the platform from customers has been good, and it has resonated particularly with professionals who are always looking for more cost effective solutions and can combine their expertise with the Equidam platform to better serve their clients.

EQUIDAMPARTNER CONTRIBUTION

Platform: Online Valuation Country: Netherlands

Founded: 2012

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Democratising Finance Infrastructure

Back Office Given that the alternative finance market is becoming increasingly complex, with players at differing stages of the value chain, in various asset classes and across multiple jurisdictions, the role of back office providers is arguably even more important than in many other industries. In the last few years, players have entered the market to address the growing needs of both the platforms and the issuers by making is easier for individuals and institutions to navigate the alternative finance market.

Crowd Valley is one such company and as an infrastructure technology provider focuses on providing platforms and back office services to alternative finance customers. It operates across six continents, acting for clients whose business models range from real assets, to renewable

energy, to equity crowdfunding. Its platform is allowing these clients to place less emphasis on technology by making the operating process easier, enabling them to focus on their primary function of sourcing issuers and investors.

Advisory Grow Advisors is an alternative finance consultant, offering advice centred on establishing new crowdfunding and P2P marketplaces. Operating all the way across the funding spectrum, it helps clients ranging from large funds to economic development agencies. For example, a recent LP client was looking to invest billions of dollars into companies and projects and Grow Advisors was able to utilise a cost effective platform model that allowed them to co-invest alongside others partners.

DEMAND FOR DIGITAL INVESTMENT PLATFORMS7

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Recently we talked with Crowd Valley about their client base and how it is adopting the digital investment market. As one would expect the market has changed markedly since it commenced operations in 2009. While its clients started out as early adopters and financiers who were focused on start-ups, now it encompasses some of the world’s leading institutions such as investment banks, asset managers and brokerages with a broader focus across various asset classes.

Crowd Valley services clients all over the world and in varying asset classes, with the majority of its clients focused on either private company investment, the real estate sector and P2P. In geographic terms its main markets are the US and Europe, as one would expect, while equity and then lending are the core models they service. Perhaps most interesting is that 5% of its clients are located in Africa, highlighting the potential for crowdfunding platforms in the developing world.

Technology has been one of the core enablers of the crowdfunding industry and continues to evolve. According to Crowd Valley, there is a current trend for traditional financial institutions to try and figure out ways that technology can allow them to provide more efficient tools to stakeholders, but with much greater regulatory pressure and more rigid corporate structures they also need to compete with smaller, more nimble start-ups. These start-ups have grown out to provide a complimentary ecosystem that encompasses credit scoring, background checks and online payments amongst other things, allowing for a more transparent and open system.

As competition in the alternative finance sector has increased, so too have platforms need to differentiate themselves. Clients are now demanding unique user experience, better access to third party API’s and great analytical ability, all of which have meant that Crowd Valley has had to constantly develop its technology. It has placed a great focus on building its API, which powers all client platforms, to support the different investment models from equity and peer-to-peer to niche sectors such as real estate and collateralised loans.

Crowd Valley is part of the Grow VC Group.

Platform: Technology, Infrastructure Country: US, UK, HK

Founded: 2009

CROWD VALLEYPARTNER CONTRIBUTION

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Platform: Technology, Infrastructure Country: Canada

Founded: 2013

The crowdfunding ecosystem requires infrastructure to be fully integrated and seamless, providing the benefits of compliance and transparency with respect to regulatory requirements. Below are more details about each of the participants, who need to work together on a global scale.

Securities Commissions are mandated by their respective governments to enforce and administer securities laws and govern the securities industries in their jurisdictions. The primary goal is to protect investors and ensure a straight forward, compliant marketplace.

Accredited investors are those investors deemed by the securities commissions to be high net worth individuals. Typically in any country around the world 3-5% of the population would be considered an accredited investor. What is surprising to many in the global marketplace is that only a very small percentage of even accredited investors get the opportunity to see and invest in private placement financings. John Kaiser a researcher in private markets in North America conducted a research report that focused on investors in private placements in Canada. Mr. Kaiser points out in his report that in the past 10 years in Canada, the private placements available to the accredited investors only 1% of those qualified were given an opportunity to invest.

Non-Accredited investors are the “rest-of-us”, the rest of the country’s population that do not meet the requirements to be registered as an accredited investor and have been demanding access to early stage investment opportunities.

Regulated Crowdfunding portals bring issuers and investors together. It sounds simple but in order to operate a regulated crowdfunding portal in most countries in the world you need to be a registered broker/dealer. The reason for this is to insure that issuers are being vetted properly to protect the marketplace and investors. But the entire global marketplace owes the emergence of regulated crowdfunding to “ASSOB” the worlds first regulated crowdfunding portal operating 12 years with zero fraud and has helped companies in Australia raise over $150Mn.

Issuers exchange shares or debt instruments, which are considered securities under current regulations, for investors' money.

3rd Party Providers are very important in the ecosystem, think of them as the chassis in a car. They are essential as your first internal crowd to get you started. The participants in the background providing technology and services to the entire ecosystem to facilitate the process of Pre-During-Post regulated crowdfunding transaction. These participants can include pre-crowd service providers, video production companies, investor networks, social media and marketing professionals, and many others.

The nature of these markets and the way business is done can change rapidly and governments are responsible for laying a proper foundation on which businesses and people can grow and conduct their business. The advancements in technology and social media allow us to bring a message to billions of people across the globe in seconds. The way we communicate, collaborate, and invest has changed forever. For anyone, anywhere in the world, involved in regulated crowdfunding, these are very exciting times.


KORECONX

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Platform: Consulting Country: HK, UK, US

Founded: 2009

FinTech has broken into the last bastion of financial markets, Wall Street. From New York to London, Frankfurt to Hong Kong, industry insiders are peering from behind monitors to witness the emergence of a revolution in finance that has been several years in the making. The financial crisis of 2008 and the emergence of FinTech are beginning to shake the landscape. Simply put, FinTech is technology working hand-in-hand with financial services, creating tools and services to meet today’s demands. These demands are being driven by millennials. Their behaviour is linked to the rise of FinTech, and the emergence of new business models and companies. The term FinTech was originally coined for the back and middle office areas to assist customers of financial organisations: a technology for financial institutions and their services. That definition has evolved greatly, and today FinTech disruption in financial services is being seen across all verticals including Payments, Lending, Insurance, Asset Management and Equity Finance. Today, emerging companies are carving up traditional sectors, and delivering superior services based on technology and a data analytics.

Alternative Lending Lending has been a big beneficiary of the rise of sophisticated social networks - those which connect people for business or investment ends. Lending Club, Lending Tree and Prosper, are among a more noticeable group of emerging platforms. Their efficient business models raise the technology bar and soon are expected to chip away at servicing the needs of SME’s and the traditional corporate world. Some banks are forming partnerships with alternative lenders as a way to participate and learn. Others are investing in alternative marketplace technology to level a tilted playing field.

Capital Raises through Crowdfunding and Crowd-Investing One disruptive category with the potential to alter the future of Investment & Commercial Banking and Wall Street is the raising of capital through crowdfunding. Some in these industry today still write-off crowdfunding as niche; the domain of 3D printers, smart-watches and struggling movie-makers. That very complacency has the potential to significantly increase the stakes and the disruptive potential. Capital raising platforms have already begun to fill the post global crisis funding gap to serve the start-up and small company market. In the coming years, traditional intermediaries and investment banks stand to see their market shares erode as experienced platforms begin raising capital for multi-million dollar projects and global institutions. Capital raising platforms have already iterated several times in the last 3 to 4 years, and soon will take centre stage with larger offerings.

Executives in FinTech businesses feel they are on the right track, and moving fast. Investment in this space tends to support this. According to Accenture, investment in FinTech more than tripled between 2008 and 2013, and grew by more than 200 percent globally in 2014. Growth in overall venture-capital investments grew by 63 percent in comparison. This trend is not going unnoticed and FinTech is expected to attract more players, with greater innovation and disruptive ideas. The future of innovation and technology continues to develop - and at a faster pace than in the past. There are many possibilities for emerging countries and regions to participate. Technology is enabling change in financial services. That’s welcome news for everyone, not only for those leading the innovation, but also for governments, investors and customers alike.

Grow Advisors is part of the Grow VC Group.

GROW ADVISORS

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INVESTORS

Rather than trying to supplant banking and venture capital, a collaborative model is emerging where digital platforms work side by side with traditional investors

“

Democratising Finance Investors

The slashing of interest rates globally in the wake of the 2008 financial crisis pushed retail investors to look to non-traditional investments to boost returns. This major development boosted the popularity of the alternative finance market as an asset class. Since then, the increased access afforded by the online investment model has meant that the industry has secured its position alongside more traditional asset classes, drawing the interest of institutional investors.

As it stands, the investor side of the alternative finance market, incorporating both debt and equity, is made up of both retail and institutional investors. As the alternative finance market moves upstream, drawing larger more established SME issuers, institutions are becoming more involved. These institutions are investing in the space both through platforms and in the platforms themselves.

Retail Retail investment into the P2P market has been primarily driven by the low interest rates available globally on bank deposits. When factoring in inflation rates, the picture for savers becomes even worse. In the UK for example, with interest rates at 0.5% after the financial crisis and inflation at around 2% up until recently, in real terms, capital deposited in banks was decreasing in value. Compared to the rates on offer from various different P2P platforms during the same period, it is easy to see why alternative lending has become so popular for consumers.

Other key drivers for P2P lending include: the diversification benefits brought about by incorporating new asset classes into a portfolio; consumers general dislike of banks as a result of their perceived role in the global recession; and the ability for investors to choose exactly where their capital goes.

The story with retail equity investment is similar - it is the outsized returns from private company investment that draws investors. But aside from this, the key driver for equity crowdfunding’s rapid growth is the increased access to a previously severely restricted asset class. For relatively small qualifying amounts, investors can now gain access to a market that has been traditionally out of the reach of most ordinary people. The low qualifying amounts also mean investors can spread their investment over a number of companies and lower overall portfolio risk.

Prior to the introduction of equity crowdfunding platforms, it was notoriously hard for individuals to invest in private companies. Legislation made it illegal for companies to advertise that they were raising funds, meaning they could not post it on a website or on social networks, making it hard for investors to identify which companies were in need of capital. Other ways were to invest were via an angel network or venture capital firm, but both are prohibitively expensive for the majority of people.

INVESTOR PROFILING IN THE US

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The private company investment sphere has long been the traditional domain of private equity and venture capital firms. However, in recent years, many institutional and retail investors have increasingly taken an interest towards investing in this exciting and promising sector. Several hedge funds are now running a hybrid model where they are not only investing in the public markets, but also late-stage startups. While this is happening, retail brokers are looking for different ways to diversify their portfolio by investing a portion of their portfolio in small private companies. What is driving this recent phenomenon? Listed below are the key factors that are helping to shape the new private investment market:

1. Start-ups are Going Public Much Later – With all the money flowing into the private sector, companies are going public at a much later stage than before. Take, for example, Amazon. When Amazon IPO’d in 1997, its market cap was $438Mn. Today, its market cap is $202Bn, which is 460 times higher than the IPO price. Compare this to Alibaba. When Alibaba IPO’d last year, its market cap was $155Bn. In order for investors to make the same kind of return in Alibaba as they did in Amazon, Alibaba would have to increase its market cap to $71Tn by 2032 - which is near impossible. Due to this trend, many investors are missing out on the benefit of investing in early stage companies, and are therefore having to invest in the private market in order reap the higher (potential) returns.

2. Globalisation – Globalisation is helping private investments reach a broader audience. Today, companies do not need to be restrained to their local markets in order to seek funding. Thanks to the Internet, companies can easily market themselves, raise funding, and make financial transactions online. At the same time, investors are looking abroad in order to diversify their investment portfolio. The ease of making investments and raising funds globally is making private investing ever more popular.

3. Information Transparency – Startups are not as 'mysterious' as they once were. Information on start-ups is now more transparent and can readily be found and obtained. There are databases, and analysis on different types of start-ups, venture capital firms, and angel investors etc. The abundance of all this wealth of information has not only instilled investors with greater confidence towards investing in start-ups, but has also made it much easier for them to track their investments.

4. The Rise of the Syndication Model – The rise of the syndication model has largely broadened the investor base. Using the syndication model, one investor can lead the deal, and other investors (who probably wouldn’t have been able to participate in the past) can now just follow the lead investor and back the deal.

5. Rich Valuations – Lastly, the valuations of start-ups have reached their richest levels in the past decade. There are currently 91 companies valued at $1Bn or more by the VC firms, compared with just 56 a year ago. And all the hype around unicorns (e.g. the next Uber) is pushing the valuations even higher. The higher these valuations become, the more it seems investors want to invest in them.

The above five factors are largely driving the changes witnessed in the private investment market today. Just like the public market though, the sphere of private investments is not without its associated ups and downs. The push towards more information transparency, globalisation and evolving private company structures means that the fundamentals of the private market are constantly changing. What can be certain though is that private investment is here to stay and will increasingly be open to more investors globally. No longer is private investment just within the exclusive domain of the traditional private equity and venture capital firms.

“The Rise of Private Investments”

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Director, Business Development, DealIndexTIMOTHY YANG

Democratising Finance Investors

Institutional Investment Thus far the alternative finance sector has seen a divisive split between the characteristics and development of equity versus debt-focused platforms. Debt platforms have outpaced equity offerings in the pace at which they have been adopted by institutional investors. In fact, many P2P lenders, such as Lending Club, Funding Circle, and Prosper, already have direct funding lines to banks. Arguably one of the reasons that the P2P lending market is comparatively more advanced than the equity crowdfunding market is that the offering is more advanced for institutional investors. Tools are more complete and allow institutions to more easily analyse investments, assess risk and execute deals. Platforms such as Orchard and PeerIQ, make the investment process simpler and more transparent. The short-term returns available through platform-based lending should also not be overlooked as a factor driving this trend. The ready adoption by institutional investors helps explain why debt platforms have received more media attention and outsized valuations, such as Lending Club’s $6.42Bn valuation as of June 2015. However, equity platforms now look set to catch up with debt platforms as they increasingly attract institutional investment.

When it comes to equity crowdfunding, a more complete offering that better serves the need of institutions is starting to emerge. As more data providers and marketplaces come online, allowing institutions to better source and evaluate deals, institutions are becoming more involved. Newer hybrid, co-investment models are evidence of institutional participation alongside the crowd.

One of the major trends in the financial markets has been ever-later IPOs by large, successful, young businesses. This has meant that investors, especially on the institutional side, such as those from hedge funds and mutual funds, are having to invest in companies when they are still private in order to see the outsized returns they used to earn from investing at the IPO stage. A number of developments are making such investing more viable and fluid.

Firstly, aside from the increased access that equity crowdfunding platforms afford investors, they are also able to massively reduce the time it takes for investors to make decisions. Platforms do a lot of the legwork by condensing all the investment articles into one place and save the investor the time it takes to reach out to a company themselves. They can also offer guidance in the form of pre-vetted deals and by being able to view the other investors in a deal.

Additionally, the growth of platforms like SecondMarket and Founder’s Club, makes it easier than ever for investors to commit capital comfortably, allowing investors to enter and exit positions in a similar way to what they have grown accustomed to in public markets.

All of this informs our view that equity crowdfunding, like debt-based P2P lending, is going to attract ever more institutional investment moving forward, boosting deal volumes and professionalising the market. Some institutional investors may even go a step further, investing in the space by buying the platforms themselves.

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CASE STUDIESP2P GLOBAL INVESTMENT

Marshall Wace, the hedge fund firm that has $17Bn under management recently floated a £200Mn closed-end fund in conjunction with Eaglewood Capital Management, a P2P investment specialist.

The fund, targeting a yield of between 6-8% annually, then further raised £250Mn in January this year. The subscription was heavily over subscribed and extended from the original target of £200Mn. This stands to highlight institutions increasing involvement in the P2P lending market and appetite for investors.

FABER VENTURES

INDEX VENTURES

Index Ventures recently led the £5.2Mn funding round of crowdfunding platform Property Partner, which is aiming to disrupt the residential property market, letting people invest for as little of £50.

Index Ventures other investments include Funding Circle, TransferWise and Wealthfront, while other notable investors in the round included Octopus Ventures, SeedCamp and Ed Wray, a co-founder of Betfair.

A popular feature of the platform is a resale market where investors can buy and sell shares in fully funded properties.

500 STARTUPS

Faber Ventures became the first major venture capital firm to source an investment through a crowdfunding platform when it invested £180k in Maily, a start-up that provides ‘safe, fun and simple email for young children’.

After seeing the campaign on Seedrs initially, Faber approached the start-up to increase its funding target to allow Faber to invest and they duly did.

Faber stated that it was able to invest because of the legal structure used by Seedrs, whereby Seedrs act as the sole shareholder, saving Faber from negotiating with every other investor.

500 start-ups, the start-up investor/accelerator group, recently announced the launch of a new investment fund - Fund III, targeting seed rounds and the occasional Series A and B.

What made this particular fundraise interesting, was that 500 Startups raised part of the $100 Mn target online via SeedInvest and in doing so became the first investment group to take advantage of new regulations and raise funds publicly via a crowdfunding campaign.

Furthermore, SeedInvest will also partner with 500 Startups to manage the investment process of the new fund.

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How has the way institutions utilise digital investing and lending evolved since the financial crisis?

The financial crisis probably accelerated the process, but it had started earlier. Digital advancements have influenced many industries and value chains, but the finance sector is more conservative and more regulated that many other industries, so the change has taken more time. Online and mobile have primarily been distribution channels and therefore have not really impacted on the value chain and structures of the finance sector. However, during the last 5 years we have also started to see changes in those areas. Typically, the existing actors (e.g. banks, funds, finance institutions) were not the first ones to adopt these new models, it was start-ups and new players that offered models like P2P lending and crowdfunding. And with these now playing more of a significant role, the traditional actors must adapt their own models.

In what regions of the globe has the growth of digital investing and lending been most pronounced? What has allowed for the acceleration of usage in certain regions from a regulatory, financial and cultural standpoint?

There has been a lot of regulatory development in the the last 5 years, but there still remain numerous differences between countries. The US market is always important in new innovations and its capital market is the most important in the world. In P2P lending the US had the first significant companies. The JOBS Act also meant regulatory changes e.g. by allowing marketing and advertising of private investment opportunities and offering a lighter IPO-style model. We continue to wait for Title III that would allow investments in private companies for non-accredited investors. This has slowed progress for crowdfunding models in the US. The UK is also an important finance hub and is now probably the leader in crowdfunding and P2P lending - with the FCA having given quite clear regulatory guidelines. China is a very active P2P lending market, but the regulatory situation is much more unclear. There are crowdfunding and P2P lending services in many other countries, but a lot of differences in the regulation and some grey areas. We expect quite a lot of growth in the emerging markets, e.g. in Asia and Africa, though the regulatory environment lags the leading markets.

Co-Founder & Advisor, DealIndex and Co-Founder & Chairman, Grow VC Group

JOUKO AHVENAINEN

“Institutions leveraging digital investment and lending on a global scale”

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Of the institutions that have been early adopters of digital investing and lending, what are some of the characteristics they share? Are there any distinctions by industry, size or geography?

As is typical in many industries, smaller players and newcomers are the first ones to adopt new models, with larger players follow when there is sufficient evidence. We are starting to see that now. Of course there are some companies that are content with their old models and not looking for growth, but those that really want to find future growth strategies and better ways to operate are willing to adopt new models. We have differences in the regulation and speed of development geographically, but there are innovative and active companies and people around the world in all kinds of organisations and industries.

What is your outlook for institutional use of digital investing and lending? How do you see it coexisting with traditional finance?

We see that these models will impact the whole finance sector. Crowdfunding and P2P lending are not isolated islands, they must co-exist with other models and do more to accelerate this process - which we are already starting to see e.g. institutional investors’ participation in P2P lending and use of crowdfunding and similar online investing platforms to find co-investors. The finance sector needs these new models, and the efficiency and transparency that they bring. They can help evolve many of the existing investing and lending models, removing non-value-adding middlemen, and positively impacting on internal processes. There will likely be many more new products, finance models and services based on digital platforms to come.

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I first started investing in crowdfunding campaigns, albeit cautiously, in around 2012 with the launch of Seedrs in the UK, although before then I had become aware of the industry via AngelList in the US. I was initially drawn not only for financial reasons but also primarily out of an interest and desire to learn more about the whole process for my own business interests.

As I see it, alternative investment platforms are not only opening up the investment market for investors but they are also making the fundraising process more transparent for entrepreneurs, educating and inspiring many would be founders who are able to not only see what kind of ideas are out there, but also learn about how companies are being run, what team structures look like and what kind of returns are expected.

Most of the companies I invest in tend to be at the seed stage as expected returns can be that much greater. From my experience, most companies listed on Seedrs tend to have validated business models and with issuers operating in a wide range of sectors, I can gain access to markets, such as the hospitality industry, that ordinarily I wouldn’t be able to.

When it comes to making an investment I tend to distribute the most capital into those industries that I understand well. I focus primarily on the team, the valuation, and who the other investors are. I also generally speak with the company before making an investment and use their product in the way a customer would. The actual process of investing through the platforms has been simple and is much easier than it would be to go directly to the companies myself, with all of the paperwork being taken care of.

One challenge I have found with the crowdfunding industry is that the process of finding the right investment is becoming particularly time intensive. There are an ever-increasing number of platforms globally, each of which draw a certain type of issuer.

While this impressive growth further stands to highlight the huge potential of the crowdfunding industry, as investors become more sophisticated there is a need for tools that allow them to find specific deals that fit their portfolios, on a global scale and in a short amount of time.

“My personal experiences of crowdfunding”

Co-Founder & CTO, DealIndex

ADAM MARTIN

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DEALINDEX INVESTOR INSIGHTSDemocratising Finance Investors

INVESTMENT PROGRESS AND INVESTOR DISTRIBUTION

FUNDING VOLUMES

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CONCLUSION

"Marketplace lenders have led the way with their high degree of institutional involvement, but given the direction of companies staying private longer, even mainstream investors like pension and mutual funds seem likely to become heavily involved in crowdfunding”

“

To conclude this report, I wanted to point out some key trends which investors and participants in the alternative finance market should look out for in the medium term.

Interest Rates How will global interest rate rises impact both the equity crowdfunding and marketplace lending spaces? Both sub-sectors of alternative finance have surged during the Great Recession, an era of historically low interest rates. This has arguably boosted the sectors’ appeal, as investors tolerated increased risk for the chance of outsized returns. Will investors remain as interested if they can earn higher returns in more conventional asset classes?

Valuations Valuations are another important area to keep an eye on. Because the equity crowdfunding space is nascent, there is little data to help benchmark valuations earned through digital fundraising versus conventional methods. As the sector matures, such data will become more readily available, allowing both investors and founders to weigh their options when raising money or investing.

Regulations So far, the equity crowdfunding and marketplace lending spaces have enjoyed comparatively little regulation. This may be set to change, as anecdotal evidence suggests regulatory authorities, including the US’ SEC, are beginning to look much more closely at the sectors. While such regulations could hurt operating margins for some platform providers, they may ultimately have the effect of boosting investor confidence and thus raising the liquidity of alternative finance markets.

Institutions Given evidence of growing institutional interest in the alternative finance sector, it seems likely that large financial firms will become ever more involved in the sector. Marketplace lenders have led the way with their high degree of institutional involvement (e.g. an 80% share for institutions at Lending Club), but given the direction of companies staying private longer, even mainstream investors like pension and mutual funds seem likely to become heavily involved in crowdfunding. Anecdotal evidence shows they are already committing capital to private companies, and we expect involvement to increase.

The alternative finance sector has now reached a tipping point where it will launch itself into the mainstream. There are undoubtedly challenges ahead, but with its explosive growth rate and high added value for all involved, the sector is set to become a mainstay of global finance.

Democratising Finance Conclusion

CONCLUDING REMARKS FROM OUR EDITOR

Duncan MacDonald-Korth Director, Research and Sales

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DealIndex is an intelligent data and deal aggregator of private companies raising capital in real-time across leading crowdfunding platforms globally. Our offerings include:

Dashboard Global Crowdfunding Aggregator: the DealIndex dashboard provides single sign-on access to thousands of private companies raising capital. Our global crowdfunding aggregator allows investors to navigate and track deals in real-time, manage their portfolio of private company investments, make informed investment decisions backed by extensive analysis, data and research.

Research & Insights Original content and research on the Alternative Finance Ecosystem including market trends and updates, fundamentals impacting the sector, and valuable insights.

Indices Tracking the global crowdfunding / alternative finance market through proprietary indices.

Sign-up for our dashboard here: https://dashboard.dealindex.co/

DealIndex is headquartered in London with offices in New York and Hong Kong. DealIndex is part of the Grow VC Group, a worldwide pioneer and leader in the crowd investing, peer to peer and online investment market. Together, the DealIndex team brings a wealth of finance, investment, technology, and startup experience.

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CONTACT

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DealIndex Research and Sales Team

Michael Cameron Edward Flach Research and Investment Associate Research and Investment Associate [email protected] [email protected]

Duncan MacDonald-Korth Neha Manaktala Director, Research and Sales CEO & Founder [email protected] [email protected]

Tom Walker Timothy Yang Director, Product and Business Development Director, Business Development [email protected] [email protected]

Media and Press Contacts

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General Contacts

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Sources for Figures and Charts 1. Perry, H., Schwartz, D. & Sun, T., 2015. The Future of Finance Part 3: The Socialization of Finance, New

York, NY: Goldman Sachs 2. Estimates from Crowdfunder 3. Estimates from Fundable 4. Massolution, 2015. Crowdfunding Industry Report, s.l.: Massolution 5. Baeck, P., Collins, L. & Zhang, B., 2014. Understanding Alternative Finance: The UK Alternative Finance

Report 2014, Cambridge, UK: University of Cambridge and Nesta 6. Forbes, Trends Show Crowdfunding To Surpass VC In 2016, 9 June 02015 [Online] 7. Crowd Valley, 2014. Digital Investing Report: Facts and Figures Q4 014, London: Crowd Valley Inc. 8. CB Insights, 2015. Crowdfunding Industry. [Online] 9. Firoozmand, S., Haxel, P., Jung, E. & Suominen, K., 2015. State of SME Finance in the United States in

2015, s.l.: TradeUp Capital Fund and Nextrade Group LLC 10. Prodigy Network, 2015. The Future of the Crowd Economy: Forecast Looks Bright. [Online]

Available at: http://prodigynetworkblog.com/crowdfunding/the-future-of-the-crowd-economy-forecast-looks-bright/ [Accessed 4 May 2015]

11. Wardrop, R., Zhang, B., Rau, R. & Gray, M., February 2015. Moving Mainstream: The European Alternative Finance Benchmarking Report , London: University of Cambridge.

12. Financial News, Five Things You Need to Know About Marketplace Lending, 22 May 2015 [Online] 13. Company Information from OurCrowd 14. Treasury Direct [Online] and Company Sources

References 15. Perry, H., Schwartz, D. & Sun, T., 2015. The Future of Finance Part 3: The Socialization of Finance, New

York, NY: Goldman Sachs 16. Crowdfunding an infant industry growing fast (IOSCO) 17. BBC News: http://www.bbc.co.uk/news/magazine-21932675 18. Alternative finance in Australia (Equitise) 19. Business Insider: http://www.businessinsider.com/oculus-rift-kickstarter-2014-3?IR=T 20. Bloomberg: http://www.bloomberg.com/news/articles/2015-04-23/lending-club-expands-into-

business-loans-with-google-alibaba-help 21. CityAM: http://www.cityam.com/209369/parking-app-now-tapping-crowdfunders-growth-capital 22. How does crowdfunding impact job creation, company revenue and professional investor interest,

Crowdfund Capital Advisors 23. Seedrs: http://learn.seedrs.com/neardesk-raises-one-of-the-largest-ever-equity-crowdfunding-rounds/ 24. Thisismoney: http://www.thisismoney.co.uk/money/markets/article-2780631/Winemaker-Chapel-Down-

raises-4m-private-investors-crowdfunding-campaign.html 25. Seedts: http://blog.seedrs.com/2014/07/13/nicola-horlicks-glentham-capital-returns-to-seedrs/ 26. Kickstarter: https://www.kickstarter.com/help/stats?ref=footer 27. Lending Club: https://www.lendingclub.com/ 28. Funding Circle: https://www.fundingcircle.com/ 29. Crowdfund Insider: http://www.crowdfundinsider.com/2015/04/67102-orchard-a-single-investor-just-

committed-1-billion-to-a-marketplace-lending-platform/ 30. Crowdfund Insider: http://www.crowdfundinsider.com/2015/04/67102-orchard-a-single-investor-just-

committed-1-billion-to-a-marketplace-lending-platform/

BIBLIOGRAPHY

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http://www.bbc.co.uk/news/magazine-21932675

http://www.businessinsider.com/oculus-rift-kickstarter-2014-3?IR=T

http://www.bloomberg.com/news/articles/2015-04-23/lending-club-expands-into-business-loans-with-google-alibaba-help

http://www.cityam.com/209369/parking-app-now-tapping-crowdfunders-growth-capital

http://learn.seedrs.com/neardesk-raises-one-of-the-largest-ever-equity-crowdfunding-rounds/

http://www.thisismoney.co.uk/money/markets/article-2780631/Winemaker-Chapel-Down-raises-4m-private-investors-crowdfunding-campaign.html

http://blog.seedrs.com/2014/07/13/nicola-horlicks-glentham-capital-returns-to-seedrs/%22%20%5Ct%20%22_blank

https://www.kickstarter.com/help/stats?ref=footer

https://www.lendingclub.com/

https://www.fundingcircle.com/

http://www.crowdfundinsider.com/2015/04/67102-orchard-a-single-investor-just-committed-1-billion-to-a-marketplace-lending-platform/


http://www.bbc.co.uk/news/magazine-21932675

http://www.businessinsider.com/oculus-rift-kickstarter-2014-3?IR=T

http://www.bloomberg.com/news/articles/2015-04-23/lending-club-expands-into-business-loans-with-google-alibaba-help

http://www.cityam.com/209369/parking-app-now-tapping-crowdfunders-growth-capital

http://learn.seedrs.com/neardesk-raises-one-of-the-largest-ever-equity-crowdfunding-rounds/

http://www.thisismoney.co.uk/money/markets/article-2780631/Winemaker-Chapel-Down-raises-4m-private-investors-crowdfunding-campaign.html

http://blog.seedrs.com/2014/07/13/nicola-horlicks-glentham-capital-returns-to-seedrs/%22%20%5Ct%20%22_blank

https://www.kickstarter.com/help/stats?ref=footer

https://www.lendingclub.com/

https://www.fundingcircle.com/



29. Crowdfund Insider: http://www.crowdfundinsider.com/2015/04/67102-orchard-a-single-investor-just-committed-1-billion-to-a-marketplace-lending-platform/

30. UKBAA: http://www.ukbusinessangelsassociation.org.uk/news/milestone-crowdfunding-major-venture-capital-firm-invests-alongside-crowds-through-seedrs

31. Index Ventures: https://indexventures.com/news-room/news/property-partner-raises-%C2%A352m-to-build-global-stock-exchange-for-residential-property

32. Venture Beat: http://venturebeat.com/2014/06/26/500-startups-public-fundraising-100m

Pictures Credit Mark Sebastian, Thomas Leuthard, Eflon, Lars Plougmann, Instant Vantage, Ondrej Supitar

BIBLIOGRAPHY

79


http://www.ukbusinessangelsassociation.org.uk/news/milestone-crowdfunding-major-venture-capital-firm-invests-alongside-crowds-through-seedrs

https://indexventures.com/news-room/news/property-partner-raises-%C2%A352m-to-build-global-stock-exchange-for-residential-property

http://venturebeat.com/2014/06/26/500-startups-public-fundraising-100m


http://www.ukbusinessangelsassociation.org.uk/news/milestone-crowdfunding-major-venture-capital-firm-invests-alongside-crowds-through-seedrs

https://indexventures.com/news-room/news/property-partner-raises-%C2%A352m-to-build-global-stock-exchange-for-residential-property

http://venturebeat.com/2014/06/26/500-startups-public-fundraising-100m

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