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What goes around: European alternative finance in Q3/16

A recent Uni Cambridge report claims that in 2015 European equity crowdfunding grew by 93%. However, since June’s Brexit referendum ominuous rumours had been heard from Britain. They had been claiming that equity round activity had, in fact, been slowing down.

It’s September and the University of Cambridge has just published its second European Alternative finance industry report. The cautiously optimistically titled Sustaining Momentum report claims that in 2015 equity-based crowdfunding grew by 93% to reach a total volume of €159m in Europe. Not quite a hundred-percent jump, but we’ll take it.

The average deal size in equity crowdfunding also reached €459,000, the number of deals with institutional money grew considerably, and my native Finland ranked second behind Estonia in alternative finance volume per capita – yay! The United Kingdom remained the largest market in equity crowdfunding by a significant margin. Congratulations are exchanged, backs are patted and everyone goes back to work feeling bullish.

All’s not well in Britain

However, the reality wasn’t all sunshine and rainbows in the industry’s largest market. Since June’s Brexit referendum ominous rumours had been heard from Britain. They had been claiming that equity round activity had, in fact, been slowing down.

Actually, slowing down might have been an understatement. The latest figures published by UK research firm Beauhurst show that the numbers of equity rounds, especially early-stage ones, are down for the third consecutive quarter in the UK. And they’re not just declining; they’ve reached levels last seen in 2013 when the equity crowdfunding industry was taking its first wobbly steps. In fact, crowdfunding was down 20% in Q3 alone. Crowdfunding still maintained its lead over the private equity/venture capital industry, whose deal numbers however only dropped by 10%.

Beauhurst attributes the slowdown to three things: Brexit (no big surprise), saturation (investors have gotten bored of some sectors that have been typically turning to crowdfunding, such as apps and breweries) and the appeal of certainty in investments (in uncertain times investors cling to safer investments and avoid the risky unlisted types). All in all, these are worrying news due to the UK’s role as the champion of equity crowdfunding in the world.

Of equity gaps and irony

Many pundits and industry insiders could certainly foresee funding activity slowing down when the news on the referendum results hit on June 23rd. But Beauhurst suggests that the numbers in early-stage deals are not solely a result of the democratic hangover, but of venture-stage investors looking for bigger tickets in bigger funding rounds. In fact, Beauhurst argues that the situation is starting to look eerily like a re-emergence of the equity gap, ie a lack of funding for early-stage businesses,

If you are familiar with the history of crowdfunding, the description above may have triggered a déjà vu. That’s because plugging the equity gap was one of the major raisons d’être for crowdfunding, and the lack of alternative funding sources for early-stage companies significantly contributed to crowdfunding platforms springing up in such large numbers. The entire situation is made more than a little ironic by the fact that equity crowdfunding platforms are also guilty of contributing to the widening of the equity gap by moving towards bigger ticket sizes themselves.

Are we coming full circle? There might indeed be a cyclical pattern here, but that’s normal for any market. The funding markets may have hit a minor rough patch in the UK, but they will pick themselves up eventually.

I think it’s safe to say that the changes that digitisation has brought to fundraising are profound, and the byproducts of said digitisation, such as crowdfunding, aren’t going anywhere anytime soon. So cheer up and go back to work feeling bullish again!

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Tagged: Points of view, alternative finance, market analysis

Mikko Savolainen

Written by Mikko Savolainen

Head of marketing at Invesdor