What persuades fintech startups and scaleups to go down the crowdfunded route? Veteran money raisers Smarterly and Money Dashboard discuss strategy, paybacks and surprises with Seedrs and Crowdcube.
Back in 2018, two British challenger banks acquired unicorn status after successful investment rounds. They were Monzo and Revolut – fintechs par excellence, with similar products and similar visions for the digital future of British wallets and bank accounts.
As well as competing for market share in the growing European fintech scene, Monzo and Revolut had also been competing for a rather special accolade: becoming the UK’s first ‘crowdfunded unicorn’.
In the end, it was Revolut that took the crown, after a Series C investment round saw it raise $250million to quadruple its valuation to $1.7billion in April 2018. In truth, of course, both Revolut’s and Monzo’s fundraising efforts could at best be described as hybrid. Over the course of their brief histories, they’d paired lucrative professional investment rounds with crowdfunding listings that offered ordinary people the chance to secure equity in their growing firms.
Crowdfunding success stories have been hitting the headlines for nearly a decade now. The Oculus Rift VR headset became an early triumph after raising $2.5million on US-based crowdfunding platform Kickstarter back in 2012, only to be purchased by Facebook two years later – for a whopping $2billion. Unfortunately, for Oculus VR’s 10,000 initial funders, Kickstarter is a ‘donate and reward’ platform. Those initial investors were rewarded with merchandise, rather than a gigantic equity buyback following the Facebook purchase.
While Kickstarter and Indiegogo tend to crowd-finance creative projects, London-based Seedrs, and Exeter-based Crowdcube, have both created platforms to help crowdfund explicitly for-profit firms. Both platforms have hosted multi-million pound Revolut crowdfunding offerings, with Crowdcube also helping Monzo make a splash in 2018 when it raised £20million in just two days – including an astonishing £3million in the first 60 seconds after the page went live.
Importantly, both Seedrs and Crowdcube are modelled as ‘fund for equity’ crowdfunding platforms, which means investors have an ongoing stake in the success of the firms they fund. This, in turn, tends to make them superstar advocates for, and users of, the firms they help to finance.
“It’s an incredibly powerful dynamic,” says Darren Westlake, CEO of Crowdcube. “You
have investors who become super-referrers, and super-loyal people to your business; they become your advocates and your evangelists, and tell people and refer people.”
As with Monzo’s memorable ‘Golden Ticket’ referral mechanism, this dynamic is all about incentivising customers to go the extra mile to grow the business they’ve backed financially.
Jeff Kelisky, CEO at Seedrs, offers an example of how this dynamic can play out.
“When Oppo Ice Cream raised with us, they signed up to sell in Waitrose. But they’re a small company, so they don’t have the resources to go and police whether Waitrose is actually honouring the contract,” he says. “So, they gave their investors a mission. They said ‘look, next time you go to your local Waitrose, take a photo of where we are on the shelf. We’re supposed to be on the top shelf. And make sure the label is facing forward!’. And they got three things out of that. They got photos from across the country, their investors felt like part of the journey, and, of course, they all bought ice cream on that visit, too.”
Another beneficiary of Seedrs’ platform, and another British fintech, Smarterly has twice raised through crowdfunding. Smarterly specialises in workplace savings, enabling employers to help their staff create savings pots direct from their payroll. As the firm’s co-founder, Phil Hollingdale, explains, crowdfunding even appears to work for firms with a B2B product.
“Our business model is B2B, and my perception was that most investors through these platforms only really invest in stuff they consume on a daily basis,” he says. “We had a target of £600k, which we raised through my network, and then, through the crowd,
we raised another £1million from 570 investors. I was surprised by that, and absolutely delighted!
“We’ve now got about 1,200 investors through the Seedrs platform, so the focus is to get them to become customers, and, for us, because of our business model, that means getting them to become ambassadors for Smarterly and introducing us to their employers, so we can start a conversation with them – that’s worked extremely well for us.”
Clearly, crowdfunding is used as much for marketing and customer engagement as it is for the financial boost itself – indeed, the funding appears, in many cases, secondary to the marketing. “For the companies themselves, they’re not really coming to us to raise money any more,” agrees Crowdcube’s Westlake. “They’re coming to us to raise awareness, to acquire new customers and also to convert those existing customers into super-evangelists.”
Monzo has reported that its shareholder customers are three times more likely than others to refer the bank to a friend, while gohenry, the crowdfunded financial literacy app for children, has reported that 99 per cent of its shareholders’ children have downloaded the app.
Firms that crowdfund may also benefit from the expertise and advice of their crowd investors. Money Dashboard – the Edinburgh-based personal finance app – has gone so far as to create an investor community portal, facilitating these productive feedback discussions.
“We benefitted from the fact that we already had a tightknit, passionate base of customers who wanted to get involved with the product, so giving them the opportunity to was great,” says the firm’s Growth Manager, Sean MacNicol. “The investor community is where they can bring up things that they’re not happy about. The skew in our investor base, through Crowdcube, is that they’re people that are already pretty savvy about other startups and companies in our space, so their level of feedback is excellent.”
It’s little wonder that an increasing number of firms – and especially fintechs – are opting to crowdfund as a simultaneous source of working capital to traditional venture capital sources. As well as embodying the ‘democratisation of money’ ethos of fintechs, crowdfunding’s auxiliary benefits, promoting brand loyalty and peer-to-peer marketing, have helped the global crowdfunding market expand blisteringly quickly. Valued at $10.2billion in 2018, the market is forecast to nearly triple – to $28.8billion – by 2025. In Europe, the UK is leading the charge, having captured 73 per cent of that market by 2016.
But how does a successful crowdfunding campaign evolve into this ongoing engagement? For Hollingdale, it’s all about communication. “I made an investment in a business a couple of years ago, through Seedrs, and that particular business is lousy at communicating, and it really frustrates me as an investor,” he says.
“At Smarterly, we’ve worked hard to communicate with investors on a regular basis. If the investors are hearing positive news about the business, and the business is prospering, hopefully that’s going to make them feel good, and therefore start shouting about the business, and help promote it.”
Money Dashboard’s MacNicol is in agreement: “Aside from the actual value of the business, investors really want to see that progress has been made since the first time they invested – they want to see what the company has actually managed to achieve with that initial capital. If they’re comfortable with the fact that the business is moving the right way, they’re probably going to get involved again, because they want to continue being a part of that,” he says.
Registering this additional responsibility, both Crowdcube and Seedrs have taken steps to help their investees communicate better with the crowd that funds them.
“We’ve built an investor relations portal that allows companies to send out regular updates, regular communications on their financials, all of those things,” says Westlake. “The easier we can make it for companies to do it, the more likely they are to do it.”
Seedrs became the first crowdfunding platform to get Financial Conduct Authority approval, in 2012, and Kelisky has built the obligation to communicate with investors into the fabric of the platform.
“Our approach has been to look at a sort of lifecycle approach to our relationship with the business and the investors,” he says. “One of the obligations, under our legal framework, is that the entrepreneur must keep the investors up to date on a quarterly basis.”
Since crowdfunding platforms are themselves fintechs, sharing a vision of financial access and literacy with the companies they host feels totally intuitive. And it’s totally delivering the goods.
– This interview took place at LendIt Europe in late 2019, part of the LendIt Fintech event series that is due to restart in October. See www.lendit.com/europe/2020/