Digital banks: the making or breaking of equity crowdfunding?

By Ryan Weeks on 30th April 2018

Challenger BanksEquity Crowdfunding

Investors from both Seedrs and Crowdcube have backed Revolut, the UK’s newest unicorn. Perhaps its biggest rival, Monzo Bank, has also raised money from the crowd. Investors in both banking challengers are looking at impressive paper-gains – but will the various fintech firms involved deliver?

Digital banks: the making or breaking of equity crowdfunding?Image source: https://goo.gl/M8D2q9

Equity crowdfunding has been waiting for a business like Revolut: a mega-trendy consumer brand, that is fast becoming a verb (‘could you Revolut me?’), has raised a tonne of cash at a staggering valuation, all underpinned by ludicrously rapid growth, to the tune of almost two million users after just three years in business.

And just to make things even more interesting: both Crowdcube and Seedrs have hosted campaigns for the banking app. The former staged a £1.01m campaign for Revolut in 2016, the latter a massively oversubscribed £4m campaign a year later, as part of its $66m series B.

After last week’s $250m series C fundraise, led by DST Global, Revolut is now valued at a massive $1.7bn. On paper, Crowdcube initially touted this as a 25 times return for its investors, while Seedrs CEO Jeff Kelisky has noted that Seedrs backers will be able to trade their shares at 3.6 times the value of their original investment on the platform’s secondary market. Crowdcube has since revised its estimate of the crowd’s paper-based return down to 22 times.

“Ultimately this is why Darren and I started Crowdcube and gave birth to the equity crowdfunding industry,” said Luke Lang, co-founder of Crowdcube, in an interview with AltFi. “It certainly does feel like a watershed moment.”

There is no denying that Revolut looks to be a stonking success for crowdfunding investors on paper. Even Rob Murray-Brown, a renowned industry detractor, doffed his cap to the banking challenger in a recent blog post.

But paper valuations are only as valuable as the paper they’re written on. How both Crowdcube and Seedrs’ investors are treated from here will be a stern test for the equity crowdfunding sector as a whole.

Thickening the plot is the fact that Monzo Bank – arguably Revolut’s biggest UK competitor – has also taken on funding from Crowdcube investors. Monzo nabbed £71m in November, just eight months after raising £22m in a series C round. £2.5m of equity crowdfunding capital, via Crowdcube, came attached to the series C, followed by another £1.5m in November. 

“For us, we don’t just see that [equity crowdfunding] as a fun thing to get some press. For us it’s really about involving customers,” said Tristan Thomas, head of marketing and community at Monzo.

“It’s not just something we do when we’re small,” he continued. “We are hoping to do a much, much larger funding round towards the end of this year or early next year.”

Thomas said that this planned funding round will feature both venture capital and crowdfunding investors. He acknowledged that a bog-standard crowdfunding campaign probably isn’t worth doing for a business of Monzo’s size, but remains confident that the bank will find a way to continue to involve the crowd in its fundraising going forwards.

“The limit in the EU is €8m for a normal crowdfunding round. As you say, that probably isn’t worth doing. There are ways to raise a larger amount of crowdfunding that involve a bunch more work – writing a prospectus and things like that. We’re looking to do that sort of raise.”

Noting the speed with which its previous crowd-rounds have sold out, Thomas said that the main goal in the future would be to make sure “everyone who wants to get involved can”.

Revolut is also reconsidering its approach to crowd-investors.

Tom Hambrett, head of legal at the banking app, echoed Monzo’s Thomas in stating that regulatory caps make the typical crowdfunding campaign unappealing for a firm like Revolut. He said that the company's senior management team has been actively considering different ways of involving the crowd, such as “bonds or issuing warrants”. Revolut has openly spoken to Crowdcube about establishing such a structure, but is yet to reach a concrete plan.

“I wouldn’t say we’re never going to do another crowdfunding, but it would probably not be in the form that we’ve done in the past,” said Hambrett.

It is rare to see two different equity crowdfunding platforms supporting the same company’s growth. Revolut, in a surprise move, jumped ship from Crowdcube to Seedrs between its series A and series B fundraises. At the time, a Revolut spokesperson said that the firm had enjoyed working with Crowdcube, but that Seedrs was keen to collaborate and offered a ‘great deal’, while Seedrs’ chief investment officer Thomas Davies said that later stage firms often choose Seedrs because of its full service nominee structure.

“Their raise [on Crowdcube] was tremendously successful and it was deeply frustrating for us when they switched to Seedrs, but we respect their decision,” said Lang.

Whether investors are able to realise the massive potential returns on offer through Revolut and Monzo alike is a pivotal question.

“We’ve handled several liquidity events for businesses in the past twelve months, including Revolut,” said Lang.

He explained that Crowdcube has, on occasion, helped to facilitate the sale of its investors’ shares to new investors (typically a venture capital firms). In these instances, the company offers backers the option of selling all or part of their shareholdings. This occurred in August last year, shortly after Revolut’s $66m series B round.

“The majority chose to stick and didn’t exit but there were a fair few that did as well, so they got some tidy returns last year,” said Lang.

Soon, they may do so again.

“We are looking at doing another liquidity event for Crowdcube holders,” said Revolut’s Hambrett. “That’s now become our logic when we raise, and it’s something that we do internally and for existing shareholders.”

Hambrett explained that Revolut has sought to offer liquidity to shareholders – both employees and investors – in recognition of the fact that personal circumstances can change. He also noted that shareholders are free, in such windows, to sell all or part of their stake in the company.

“Having run the process last year for the company and doing it again this year, it’s open for everyone and a lot of guys here will hold on because that’s why they’re here,” he said.

Commenting more broadly on investor returns at Crowdcube up until the end of 2017, Lang stated: “21 per cent of all Crowdcube investors have had the opportunity to realise financial returns adding up to £18.5 million. These include full exits, such as Camden Town Brewery being acquired by AB InBev in 2015, and Revolut’s secondary share sale in August 2017. On the latter, some investors chose to realise a 5 times return on their investment which totalled over $800,000, while others decided to stay in.”

Seedrs launched its secondary market in the Summer of 2017. Initially on stabilisers, the tool simply allowed investors to either increase or reduce their holdings in companies which they were already invested in on a once-monthly basis. In short, should you have wished to sell Revolut shares in a trading window, you would have needed your fellow backers to want to increase their stake in the company.

But Seedrs opened up its secondary market to new investors earlier this year. Seedrs boss Kelisky has previously told AltFi that Revolut has been one of the highest traded companies on the secondary market to date.

On the matter of liquidity, Monzo has again adopted a different approach to Revolut. It has not staged any liquidity events for Crowdcube investors, and while it is carefully considering its options, Thomas made it clear that an IPO remains the most likely exit route.

“We’re very clear to people that they shouldn’t expect this to be a short-term gain investment,” he said.  

A common fear in equity crowdfunding is that individual investors will – due to limited experience and/or a relative lack of clout – be mistreated in relation to incoming institutional backers.

DST Global, the Hong Kong investment firm which led Revolut’s $250m fundraise, is a big beast. The $1.7bn fund has invested in a host of category-defining technology businesses, including Deliveroo and Funding Circle, often in a leading role.

At every stage of the Revolut journey, crowdfunding investors have backed the banking challenger alongside institutions – but on equitable terms, according to Lang.

“During the Crowdcube round, the crowd investors got exactly the same shares as the venture capital investors who they invested alongside,” he said. “So they got the same price and the same rights as those venture capital investors. The Revolut investors are in a pretty good position there. I know Revolut really, really well and I fully expect them to respect all their shareholders.”

Commenting on Monzo’s fundraising via Crowdcube, Thomas said: “We’ve always tried to give our crowd-investors the same rights, the same valuation as our existing investors. We’ve always tied it to a VC round. I think that’s really, really important and as much as we can, we’d like to continue that.”

He added that Monzo will look to give its crowd-investors a meaningful say in how the bank is run, and that the company has a few ideas (but nothing concrete yet) about how to bring those investors closer to the business.

A massive part of the appeal of equity crowdfunding is that it offers ordinary investors the chance to back ‘the next big thing’.

Lang pointed out that Revolut is not Crowdcube’s first unicorn. The at times controversial craft beer company BrewDog sold a 22 per cent stake to private equity firm TSG Consumer Partners last year, valuing the company at £1 billion. Its equity crowdfunders were offered the chance to sell up to 15 per cent of their shares in the business, according to the Telegraph and other publications.

“It’s a trend that we’re starting to see now,” said Lang of unicorn companies.

 

Comments

Rupert Taylor

01 May 2018 02:13pm

Dear Rob. I wanted to respond on behalf of AltFi Data. I remain confused that you did not value our work. Our ‘Where Are They Now’ reports were the only standardised representation of the performance of the equity crowdfunding sector - indeed they continue to be cited long after we have ceased updating the report. [https://www.wsj.com/articles/slippery-way-to-grab-a-slice-of-the-next-google-1525166869?tesla=y] The methodology, which was thoroughly explained, was completely objective. We have discontinued the reports as there was inconsistent support from the originators to participate in a standardised and verified analysis.(Something that we find to be rather alarming). We were trying to create real accountability for the sector to a constant measure of performance. We continue to believe that this will do more for investors, and for the credibility of the asset class, than any unstructured and anecdotal approach ever will. Nonetheless we wish you luck in your efforts to hold the sector to account. Regards, Rupert Taylor

Ryan

01 May 2018 01:46pm

There is no connection between us but please do go looking for one. I've just asked our directors - none of the same shareholders. I really feel your comments are unfair Rob and I have tried to respond in a reasonable fashion, but I feel there's nothing more to say.

Rob Murray Brown

01 May 2018 01:38pm

As expected, a waste of time. Altfidata is just as bad as you are. I will find the connection between you and Crowdcube as I dont believe your journalism could be that bad otherwise. You really should not print things you know nothing about and cant be bothered to check. Although unfortunately you are not alone - journalism is a mere shadow of what it should be. And yes Ryan I do know that Crowdcube returns are mainly made up of bond repayments - they state as much if you bothered to check. We really care that what we write is accurate and doesnt mislead readers. Sigh(anyone can do that) - It is such a shame that the platform you have is being so misused. Do you and Crowdcube have any of the same SH's? I may know thew answer to that on as well!!

Ryan

01 May 2018 01:03pm

Ah Rob, hello again. So firstly we would not throw anyone off the site unless their behaviour was causing offence. Yours certainly isn't. As I have said, your website is more specialised than ours. We are an industry trade publication focused on alternative finance, digital banking, digital wealth management and other topics. We do not have the luxury of focusing as relentlessly as you have, over the years, on a single area (such as equity crowdfunding), which is, incidentally, one of the reasons why I regularly check your blog. Answers to your points: 1) It is true that we do not cover many Crowdcube busts, but we do not cover many successful fundraises/funded Crowdcube companies either - that simply is not our focus, nor our audience. Yes, we have written about a number of firms (P2P lenders, digital banks, etc.) that have raised money via Crowdcube/Seedrs, but that's because these firms fit within our editorial scope. Were they to go bust, I can assure you that we would write about it. Furthermore, it is simply not true that we never publish negative stories about Crowdcube. We've written a number of times about issues with their mini-bonds, BrewDog (Punks Beware), etc. 2) This piece is supposed to be about what happens next for equity crowdfunding investors that have backed digital banks (Monzo, Revolut, etc.). It reveals (for the first time) a number of interesting developments that such backers can expect in the future (the possibility of a prospectus raise for Monzo investors, the prospect of managed liquidity events, etc.). Perhaps it does not follow every single thread through its ultimate conclusion, but it is already a pretty meaty read. Surely you understand that not every article can be totally and utterly exhaustive? Your own piece on Revolut's $250m fundraise, for example, was a mere 200 words - but I do not look at that and find fault in what it neglects to tell me; I find value in what it does tell me. It is not uncommon to quote executives on their performance. More research could be carried out to test their claims, of course, and this is certaily something we'd be interested in (and indeed something our sister company AltFi Data has done a lot of work on) but you have to pick your moments. 3) Echoing what I've outlined above, I disagree. Even in this article I have pointed out that Revolut jumped ship from Crowdcube to Seedrs, hardly a postitive story for the former. 4) I completely agree that the angle you point out is an interesting one, but just not what I chose to focus on. As written above, there are many very interesting angles in this story - besides the one angle you've decided is THE angle. 5) I disagree that these are the same thing. 6) I assure you there is no financial connection between the stories we publish and Crowdcube, or any other company. Crowdcube were a low-level sponsor (supporter) at an event we ran in 2016, but sponsorship of our events has no bearing whatsoever on our news coverage. You yourself write that 'you bet' the % return includes bond payments - do you know? If so, fantastic. I hope to be able to quote you one day. One of the biggest issues with the equity crowdfunding sector, such as we see it, is that platforms are not being held to a common standard and it is extremely difficult to compare performance like-for-like between platforms. As you know our sister company AltFi Data has made extensive attempts to do this (which again, bafflingly, I understand you were not a fan of - quelle surprise!) through their 'Where are they now?' reports, before focusing their energies on online lending. 7) We are in no way attempting to help Crowdcube or any other company through the news we produce. We have always strived to be balanced - indeed it is very important to me personally, which is why I am taking the time to respond to your comments. The fact is we simply don't cover equity crowdfunding all that often in relation to other parts of the fintech industry - but for the first example of balanced reporting that springs to mind, see for example our Wellesley coverage: http://www.altfi.com/article/2469_wellesley_co_put_on_notice_over_late_accounts_launches_fundraise_on_seedrs. 8) I certainly didn't mean to make secondary markets sound commonplace... Sigh. Anyway I'm not sure we're going to agree on much but I do appreciate your comments and will continue to visit your blog whenever covering an equity crowdfunding story - one small part of the range of topics we cover at AltFi. Thanks again, Ryan.

Rob Murray Brown

01 May 2018 12:07pm

Thanks Ryan for the response. At least unlike Crowdcube, you dont just throw me off your site. I take issue with you and your publication a number of key areas - 1. When have you ever written a piece about the companies that have funded via Crowdcube and gone bust - quite a few in very dodgey circumstances. Ethos Global (£800,000) is just such a case still on going. Sloar Cloth Company is another - we have records on a large number. Our estimate is that you almost never, if at all, cover these. Yet failures far exceed any successes in terms of numbers and ROI/lost money. Fraud is never far away. 2. This piece is more about the 'success' of Crowdcube than Revolut. You have Luke Lang all over it like a rash. Yet you do not test the assertions he makes here about investor returns etc. 3. As you have admitted, poor research has led you to the wrong conclusion about Brewdog - and in turn about Crowdube returns. Your article emphasises only Crowdcube's positives. Its is not balanced. This is a trend in all of your publication's articles on Equity CF. 4. The real story here is about how Crowdcube investors, loyal Crowdcube clients, were sidelined by Revolut in favour of their customers who had to show they had introduced X number of new Revolut clients - the number we have been given is 20, before they could stay on the 'investor list' - this, even if you applied before others with over 20 recommendations. Now it's possible you didnt know about this - your research isnt very thorough. Either that or you and Crowdcube decided to ignore it. 5. You may not have said that Unicorns are becoming the norm for Crowdcube but you put in Luke's quote to the same ends, which is the same thing. Your article implies and states that they are. Clearly this is a total fabrication. 6. Our blogs emphasis has always been on revealing what Crowdcube and on occasions the other platforms, are really up to. So not their PR picture but the real one. We have been very consistent with saying that Equity CF can work, just not as its run by Crowdcube - so we are not industry detractors. We believe that Equity CF will be a great boost for SMEs - my area of expertise. But it has to be done professionally not like some cheap car boot sale. We have always been serious about revealing the PR nonsense you and others print and wonder if there isnt some connection financially between you and Crowdcube? We do not confuse fact with fiction and we verify all our facts before we publish - otherwise the several attempts to silence us would have been successful. This is clearly not a practice you adhere to, as the fake information in your piece proves. Your publication along with the Insider ones just print the PR. For instance in this piece, did you bother to check to see if Luke Lang's claims about “21 per cent of all Crowdcube investors have had the opportunity to realise financial returns adding up to £18.5 million.'' No you just put it there as a fact. So does this include bond payments? If so (I will bet you it does) what % of this is equity returns and what is bond? They are like chalk and cheese. Only you fail the Gromit test. Surely what your readers want to read is some analysis of what Luke says - everyone knows he paints the best possible picture and most people know its painted by fairies. 7. Wouldn't it be fantastic if your style of publication actually held the feet of people like Lang and Westlake to the fire, so we ended up with a balanced, professional analysis of what is really happening. Before it is too late. Crowdcube will need more cash shortly - so maybe that's why you are helping them out? 8. Liquidity - I don't agree with your view but I can see Seedrs are trying to create a secondary market. Very limited just now. Whether you meant it or not the article makes it sound common place. The industry needs a better balanced press - we seem to be the only ones interested in a what really happens to investors once their money has been spent and how really poor business plans are getting funding based on S/EIS rebates. That's about it for now.

Ryan Weeks

30 Apr 2018 09:23pm

Hey Rob, thanks for this. So I knew that Revolut advertised the Crowdcube fundraise to its customers and allowed them to pre-register their interest. Two things on that: one, it is highly likely that there's overlap between the customers of both Crowdcube and Revolut. Two, what I wrote was that Crowdcube staged a £1.01m campaign for Revolut in 2016. This is true regardless of how many investors were pre-registered - I am struggling to see the gripe there. Unlike your blog, this website is not concerned exclusively with the actions of and fate of equity crowdfunding investors; the customers of a digital bank are every bit as relevant to us. To point number two, at no point in the article have I written that unicorns are becoming the norm for Crowdcube. I wrote that you 'doffed your cap' to Revolut (not their valuation) because on your blog post about their fundraise entitled 'Revolut make a 20X paper gain for Crowdcube investors' (https://fantasyequitycrowdfunding.blogspot.co.uk/2018/04/revolut-make-20x-paper-gain-for.html) you closed by writing 'Hats off indeed'. If I have been unfair here, I am struggling to see how. Indeed I find your blog a useful resource, and visited it on this occasion for your take on the Revolut fundraise! Now, having said all that, I do accept that I was not aware of the £600 BrewDog cap, and that this would have been a useful detail to include. Of course, it is difficult for any to article to be entirely exhaustive, particularly when the focus of the article in question is not on BrewDog - however I shall bear this detail in mind for the future. To your final point, I agree and I disagree. I have stressed time and again in the article that the impressive gains are paper-based only (see, for example: 'But paper valuations are only as valuable as the paper they’re written on.'). So I agree with you there. But Revolut does not seem to me to be 'entirely illiquid' at all because, one, Hambrett confirmed for me that they would stage another liquidity event for Crowdcube shareholders very soon (to be fair I don't know whether this will be orchestrated by Asset Match, but in the conversations I've had they were not mentioned) and two, because Seedrs operates a secondary market - even if it is not yet fully functional. I look forward to your reply, and I really do appreciate your comments. All the best, Ryan.

Rob Murray Brown

30 Apr 2018 06:04pm

I think you have been had here. Revolut's Crowdcube raise was staged - most if not all Crowdcube investors failed to get any action as Revolut were prioritising their customers first - so when the raise went live (even privately) the waiting list was already over full. Revolut used Crowdcube for some handy PR. Lovely quote you have from Luke - dont you ever query what these guys tell you? Unicorns becoming the norm for Crowdcube companies - please do some research. Whilst Revolut is at this moment steaming ahead, which is by itself commendable, i certainly did not raise my hat to their valuation. And you need to research your Brewdog facts. Investors in Brewdog were allowed to sell up to a maximum of around £600 via the TSG deal. It was either 15% or that £600 cap. That's hardly going to make anyone rich. All other gains for both Revolut and BD are on paper only and entirely illiquid unless they can manage a sale on Asset Match.

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