Crowdcube reveals its key expectations for the crowdfunding market in 2017
As small businesses increasingly look to alternative methods of financing, crowdfunding platform Crowdcube expects the market to continue growing in the coming year.
Crowdfunding, which allows a group of investors to fund small businesses in exchange for equity, has seen strong growth in recent years. The number of companies seeking funding rose in 2016 from 367 to 751 companies, according to a November 2016 report from Altfi Data. The internal rate of return was 19.14 per cent, rising to 33.79 per cent when adjusted for EIS/SEIS tax relief, according to Altfi Data.
Below we take a look at five of Crowdcube’s predictions for growth in crowdfunding in the coming year.
1.‘Returning to the crowd’
Crowdcube expects businesses to use crowdfunding to grow their company in series B and series C rounds. In addition, companies are likely to seek venture capital investments, along with institutional investors, such as when on-demand grocer Farmdrop raised £3m in a funding round led by investment firm Atomico.
2. ‘More returns for investors’
While there has been an increase in company investments, there have only been a handful of exits, the most recent being Oval Medical. The medical start-up was sold to pharmaceutical device manufacturer SMC Ltd in December. Crowdcube expects more exits in 2017 as the industry matures.
“Combined with bond interest payments, a total of £5m has been returned to investors on Crowdcube since 2013 and we fully expect to see more returns due to trade sales and IPOs – a further indication of how the crowdfunding industry is maturing and the diversity of returns that crowd investors can expect to receive,” said Crowdcube.
3. ‘Brexit fallout will lead to government ‘PDAs’
The UK government is likely to show “public displays of affection” to appease the growing uncertainty around Brexit. Chancellor Philip Hammond made an appeal in his Autumn Statement by announcing plans for £400m of VC funds in the UK, and the platform expects similar displays to continue.
“While a good start, we would argue that limiting this much-needed cash injection of investment to traditional VCs is short-sighted and fails to recognise the impact of crowdfunding on seed-stage and growth businesses in this country,” the company said.
4. ‘Due diligence will remain an important talking point’
The firm expects more due diligence and transparency around both crowdfunding and how businesses are performing after funding. It also expects a unified approach and potentially a standard that sets out operating principles and a common portfolio performance methodology.
“The industry needs a level of due diligence, disclosure and reporting that all parties – entrepreneurs, investors and regulators – can understand,” the platform wrote.
5. ‘The next wave of tech businesses’
Financial technology investment is likely to grow in the growing year, as more companies become diverse. Crowdcube expects more investments in the technology sector, including fintech, healthtech and cleantech.