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Crowdfunding and IPOs: Is equity crowdfunding just corporate finance?

In November 2016 we hosted the first ever crowdfunding exit via IPO in the form of Heeros’s First North IPO. What if equity crowdfunding platforms started focusing on only doing IPOs and fundraising for listed companies?

Recently we at Invesdor have been spending increasing amounts of time and effort on bigger deals, such as IPOs. And it’s been good: first we helped Siili Solutions raise more than 3 million and list on the Nasdaq Helsinki main market, and now we’re hosting the first ever potential crowdfunding exit via IPO in the form of Heeros’s First North IPO.

In a way, this is quite a departure from the original mission of crowdfunding, which was all about democratising finance. It was about connecting young companies that deserved a chance to get funded with retail investors who deserved a chance to get in on early-stage investments.

A while back a colleague of mine asked a good question about this change in focus: ”Shouldn’t we just call ourselves a corporate finance house?” At the time it sounded like an almost heretical idea, so I brushed the question off with an answer that had something to do with branding-related choices. But the question stuck with me, and now with Heeros’s historic IPO it’s become relevant again.
 

Chasing whales vs cultivating minnows

What if equity crowdfunding platforms started focusing on only IPOs and fundraising for listed companies? The margins are higher and there’s more dusty processes to disrupt in the old capital markets. And frankly, IPOs are exhilarating to participate in. In the short term, dropping all other business and focusing on IPOs and large public market transactions would probably make sense for many regulated equity crowdfunding platforms with the capability to pull off IPOs.

However, such a pivot would be short-sighted. The technology behind the subscription platform of equity crowdfunders might be robust, but it’s nothing that the Wall Streets and Cities of the world couldn’t copy or acquire by buyout. Investor databases also aren’t sources of sustainable competitive advantage because investors are free to move between service providers with low to no switching costs. I think there would be little in the form of a potential sustainable edge to justify a deep dive into the corporate finance world.

But more importantly, there would be no significant change. Sure, making it cheaper to organise equity issues might be passed on to the customer thus lowering the costs of listing. This could result in companies listing earlier, which then would speed up the ecosystem a little. But I think overall this could hardly be called revolutionary.
 

Stories aren't build overnight

Instead, I feel that the way forward for equity crowdfunding is in encompassing the whole spectrum from seed stage to IPO. Resisting the urge to focus solely on big transactions pays off in the future as platforms are involved in building good equity stories. Crowdfunding platforms should follow businesses from start to exit and beyond, because good stories make for happy investors.

Heeros’s IPO is made special by its crowdfunded equity story. Heeros raised €660,000 on Invesdor last year from more than 200 investors. These investors now have the chance to sell if they so choose or continue holding and stick with the company as its story develops. I was the account manager in Heeros’s 2015 crowdfunding round, as I am now in their IPO, and I think there is nothing more satisfying in my job than seeing the equity story work out for the company and for its last year’s investors. I think any business angel who’s made a successful exit from an investment would agree.

It’s these kinds of success stories that make investing exciting. Crowdfunding should focus on bringing the possibility of being part of such stories to the small retail investor as well as the professional family office manager or business angel. What this requires from both investors and crowdfunding platforms is a focus on the long term. After all, good stories aren’t built overnight. 

 

This material does not constitute an offer or a solicitation of an offer to acquire any shares. Please note that the Heeros offering is only available in Finland and to limited investors in the EEA. The materials in Finnish can be found and share subscriptions made at Invesdor.com/heeros2016.

 

Mikko Savolainen
Communications manager
Invesdor

Tagged: Points of view

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