Digital banks: the making or breaking of equity crowdfunding?

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.