Since the foundation of equity crowdfunding in 2011 there have only been a handful of exits by way of trade sales that have given investors healthy returns, amongst them Camden Town Brewery to AB InBev and E-Car Club to Europcar. Only six years into this new market, this is not unsurprising: start-ups and early stage companies need time to mature to make them attractive to potential buyers or IPO and for the majority of these companies they still have a way to go.
Delivering a return for shareholders is the ultimate goal for any high-growth business and its investors and a recent run of liquidity events continues to debunk the myth that crowd investors will be locked-in indefinitely.
It kicked off when crowdfunding poster child BrewDog announced that American private equity firm TSG Consumer Partners had acquired a 22 per cent stake in the business for £213m, giving the fastest growing brewery in the UK a valuation of around £1bn. As part of the TSG deal, shareholders were informed that they would be able to sell up to 40 shares back to BrewDog.
This was followed by biotech company Celixir the next day, which delivered a 2.7x return with a share buy-back giving the Cardiff-based heart medicine company a valuation in excess of £200m; triple the figure it was valued at just two and a half years ago.
A third event by Mettrr Technologies saw the artificial intelligence software company complete the first share trade on an crowdfunding platform when angel investors snapped up crowd shares delivering a 9x return.
These milestones are a strong signal to investors of the industry’s growing maturity and there is no doubt that we’ll be seeing more activity like this. But key to providing more opportunities for returns through secondary trading is to work with growth stage and venture backed businesses, as these are more likely to attract further investment down the line and therefore offer more liquidity events.
With growth businesses come large raises that attract the bigger investors. According to a recent report by Beauhurst, our sector has seen growing numbers of raises over £1 million with 17 taking place this year so far. On our own platform, of the 60+ £1m raises that we’ve conducted since 2011, 50% of these have had VC or institutional involvement, the majority of which have invested on the same terms as the crowd. A recent example is by electric vehicle chargepoint supplier and one of the UK fastest growing tech firms, POD Point, which raised £1.5 million from the crowd as part of a £9 million round led by Barclays Bank and Draper Esprit.
But as we have shown before, crowd investors are not unsophisticated: they are clear about the risks of crowdfunding and importance of spreading that risk. They are also far more patient and less jittery than the press headlines would suggest. VCs for example expect to strike gold with one in ten of their investments and crowdfunders are not so different in their thinking. Much is made of failures in the media, and of course we are always extremely disappointed when these happen, but rarely do you hear a complaint from an actual investor.
In contrast, when given the option to exit, whether they cash out is directly related to the rate of returns they will get and how much further they believe the investment can go. The entry of a large investor is often a signal that there is more to come from the business: if they think they are onto a good thing, they are as likely to hold (or at least partially) than realise their investment. When comparing the uptake between Mettrr and Celixir, a greater proportion of investors in the latter decided to hold.
That is not to say that opportunities to sell shares shouldn’t be given, and in time they will need to become more frequent in order to recycle capital back into new investment opportunities. We are working towards this and are currently beta testing a fully-fledged share trading platform. What is true is that the private share transaction market is ripe for disruption, much in the same way that investment has been democratised.