Crowdfunding sites do battle with VC firms

Crowdfunding platforms and venture capital firms are going head to head to capture the growing interest in investing in early-stage companies in a move that could spark a round of consolidation between the two.

Venture capital specialist Downing recently issued more bonds to complement its existing crowdfunding platform, while Syndicate Room launched a fund that tracks the investments of business angels and VC investors on its platform.

The cross-sector moves are seen as part of a wider process that could lead to mergers between crowdfunding platforms, which allow investors to either take stakes in or lend to smaller companies, and venture capital firms.

“There is overlap in the kind of companies sought out by venture capital and crowdfunders, while at the same time there is a limited amount of retail money which will be invested in this sort of company, which lends weight to the idea that there may be some consolidation,” said Laith Khalaf, senior analyst at Hargreaves Lansdown, the UK investment broker.

Initially, venture capital firms were more likely to be the acquirers of crowdfunders, he added. “Crowdfunding is a relatively new phenomenon, and unlike [venture capital trusts] there is no real way of seeing how crowdfunded enterprises have performed. So for the moment I think VCTs are probably still the predominant form of investing in early-stage companies.”

Globally, however, crowdfunding has already overtaken the venture capital industry in terms of funding for smaller companies. According to Massolution, the consultancy, $34bn was invested through crowdfunding platforms in 2015, compared with an annual average of $30bn placed via venture capital funds.

The growth of the market has been exponential. Six years ago, the crowdfunding industry was worth just $880m. The World Bank estimates it could reach $90bn a year by 2020.

Competition between crowdfunders and venture capital firms, both of which style themselves as experts in investing in early-stage companies, has been fierce in recent years.

“VCT managers were the obvious people to get behind one of [crowdfunding bonds],” said Ben Yearsley, investment director at Wealth Club. In terms of lending money to smaller, early-stage companies, VCTs have more expertise, he said, as “they’ve done the due diligence and they know the management teams”.

Other financial services firms are also looking with interest at the crossover between the two sectors. In April, Octopus Investments, the UK fund manager that specialises in small and medium-sized companies, launched Octopus Choice, an online peer-to-peer lending product.

“It is going to be a telling year in crowdfunding,” said Julia Groves, a partner at Downing. “You will see more overlap. There is this idea of the need for scale, and you will see partnerships forming and definitely see some consolidation, which is normal at this stage in the market.”