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Author: Sacha Bright & Oliver Murphy
Given the unprecedented economic impacts of Coronavirus, we at NextFin would like to provide our customers and partners with an update on how the equity crowdfunding market is responding to the pandemic.
According to data from the UK-based crowdfunding platform Seedrs, community funding was 20% lower in March than it was in spring over the last three years.
In an interview with Sifted, Seedrs chairman Jeff Lyn said: “Activity, both in terms of campaigns going live and volumes of investments, has slowed a bit from what we would normally expect.”
Crowdfunding platform Crowdcube has also seen a drop in investment. According to co-founder Luke Lang, 9 of the 27 pitches launched on its platform last month have not reached their targets yet. It is believed that one of these is the fintech app Coconut, which has delayed raising finance with Crowdcube.
Investors’ greatest challenge is that the level of uncertainty surrounding coronavirus is extremely high. With markets experiencing one of their worst months since the financial crisis, many investors are looking to the government to provide support for investors.
Equity crowdfunding is a process whereby people can invest in unlisted businesses in return for shares via an online platform.
To offset some of the risk involved with investing in early-stage companies, the UK government offers reliefs on eligible opportunities in the form of the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). Both offer tax incentives, with 30% and 50% income tax relief available.
Previously stock markets were largely aimed at professional investors, including the smaller AIM stock market, which was originally founded by our Chairman Stephen Hazell-Smith with the London Stock Market to fund SMEs, but due to regulatory restrictions, evolved into a professional investment market.
The equity crowdfunding market has helped bridge the gap between start-up funding and listed businesses by democratising the investment process to open the door to retail and professional investors who take advantage of the EIS and SEIS tax incentives.
As the alternative finance marketplace, Nextfin has reviewed a total 4,679 equity crowdfunding pitches, and over the last few months, our analysts have witnessed a significant decline in the number of equity pledges.
Overall, Nextfin’s calculations have shown that equity crowdfunding has gone from raising a cumulative £967.6 million over the last seven years, to suffering nearly a 40% drop in activity last week.
As the graph shows, between January and March the total amount of equity pitch pledges declined by £1,752,273.
In a statement, Nextfin’s Director of Ratings Susie Gao said: “Following the outbreak of the coronavirus, we have seen a considerable reduction in the value of investment pledges as well as the number of new equity investment opportunities being marketed on all the UK crowdfunding platforms.
Although triggered by the announcements of the 24th March, we have already seen a marked reduction in the average investment pledges since the beginning of the month.”
In the last ten days of the month in January, Nextfin tracked an average daily investment of £152,000. In February this figure was £129,000. However, in March this had dropped to £38,000 on average per day.
She added: “While we continue to rate and publish all the equity funding pitches, we note that in almost all cases the forecasts and business planning associated with the funding pitches have not been adjusted for the impact of Covid-19, something we expect will follow in the coming weeks.”
Sacha Bright, CEO of Nextfin, added: “Although we are mindful that many businesses that are funding have not taken Covid-19 into their plans, most early-stage businesses are pre-revenue and are in the R&D phase, so will not be affected by the crisis. However, they desperately need funding. On that note, if you are looking to invest and take advantage of large tax incentives, early-stage businesses may be the right route if they are in the R&D phase and have enough funding to get through the crisis. However, please remember your capital is fully at risk.”
Despite a slow-down in the number of equity pitches, the site Crowdcube has reported that it has seen a spike in interest for Medtech, digital GP services and farm-to-table delivery services. Consequently, the platform was able to help 17 startups raise a total of £5m from 6,000 investors in March.
To prevent crowdfunding from drying up completely, Seedrs and Crowdcube have announced that they are implementing a series of emergency measures.
Seedrs has launched online pitching events to allow founders and prospective investors to engage digitally. Crowdcube, on the other hand, has said it will enable businesses to help businesses access the money they raise quicker than usual.
In a statement, Crowdcube said “We expect that raising finance will now take longer than usual, so we suggest allowing for longer lead times when considering your next funding round. We’re committed to giving the businesses the time they need to complete a successful round on Crowdcube, so campaign timelines will now be more flexible.”
Crowdcube have also launched their ‘Save Our Startups’ campaign which has put pressure on the Treasury to co-invest and incentivise private investors to invest in start-ups, as reported today in The Telegraph
There is no doubt that the slowdown in equity crowdfunding will have had a significant impact on early-stage businesses. That’s why, along with the Enterprise Investment Scheme Association, we are lobbying the government to raise the threshold of the Seed Enterprise Investment Scheme and the Enterprise Investment Scheme to encourage investors to make further private sector funds available, which has to be in the interests of both the businesses and the Government.
Increasing tax incentives and co-investing will make a difference to the 30,000 startups employing 300,000 people and should be embraced by the government. For if they are not, a decline in investments won’t just hurt early-stage companies, but the entire equity crowdfunding ecosystem.
More details of our campaign can be found by reading our open letter.
Disclaimer:
To the best of our knowledge, the information we have provided is correct at the time of publishing. SEIS and EIS tax benefits are dependent on your financial circumstances. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed.
Risk Warning:
Investing in equity crowdfunding and early-stage businesses involves high risks, which may include long-term investment horizons, illiquidity, lack of income and potential dilution. Any investor needs to be in the position to afford a total loss of capital invested.
NextFin is targeted at members who have the knowledge and experience to understand these risks and make their own investment decisions. You will NOT invest through NextFin but through the relevant crowdfunding website which also has signed off the content as a Financial Promotion on its own website. NextFin is not the originator of the financial promotions that appear on its site. However, we do to the best of our ability carry out limited compliance checks on the originator and the company seeking funding to ensure they are conforming to FCA regulations and anti-money laundering equity/requirements as appropriate. Business Agent Limited, trading as NextFin, takes no responsibility for this information or for any recommendations or opinions made by the companies or its users. Click here for our full risk warning.
Tagged: News EIS SEIS Equity Crowdfunding Seedrs
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