" class="no-js "lang="en-US"> EXCLUSIVE: Does crowdfunding present a stop gap for fintech funding in 2023? - Fintech Finance
Wednesday, May 29, 2024

EXCLUSIVE: Does crowdfunding present a stop gap for fintech funding in 2023?

Crowdfunding has long been seen as a way for an audience to support creative projects but increasingly startups are using it to access an entirely new area of funding.

It’s ideal for B2C fintech startups who want to gain momentum and leverage the complaints of users for whom their product is the fix. 

Several big names in the space have looked to crowdfunding at one point or another, using platforms such as Crowdcube or Seedrs to release their pitch to the masses and raise money. Both Monzo and Revolut launched crowdfunding campaigns near the start of their journey, in 2016, with the former going on to raise £2.3 million in 2017 and, with the help of institutional investors, almost £20 million in 2018.

Freetrade, the popular digital stock brokerage, has used crowdfunding as an integral part of its fundraising strategy since the beginning. The app, which provides easy access to retail investing in a range of stocks, funds and more has also been raising since 2016.

Their extensive use of the strategy is not common but is possibly representative of a trend. After all, with VC funding for fintechs seeing a steep decline in the last year and past failures making investors uneasy, startups are undoubtedly looking for other options.

In this article we look at some of the fintechs who have gone down that route and some other benefits to crowdfunding that may make it an attractive funding option. 

Is crowdfunding the answer for cash strapped fintechs?

It’s not a great time to be looking for funding from institutional investors. Funding deals during Q1 2023 dropped by 42% compared to the previous year and unicorn creation was down from an average of 40 per quarter in previous years to just 3 in 2023. Investment in UK fintech also fell behind Deeptech and Climate tech this year as investor priorities shifted. 

This is particularly true with consumer-facing fintech, and so as DIY investment platforms like Freetrade, eToro and Robinhood have become more popular in recent years, it’s understandable why a company in need of funds might turn directly to consumers.

Freetrade have been doing just that since the beginning and they completed yet another funding round in July 2023, that raised almost £2.4 million from 4678 investors. 

That isn’t anywhere near the level of their record-breaking fundraiser in November 2021, in which they became the first company to raise £6 million in less than 24 hours, raising £8,363,176 in total. It is however a slight increase on their 2022 round which raised £2.1 million, at least suggesting their crowdfunding activity is sustainable.

So committed are they to this method of fundraising that they now have over 19,000 shareholders through crowdfunding, taking a significant stake of the company alongside VC and PE backers.

But the context surrounding this latest round is interesting. It comes in the wake of reported losses of £39.7 million for the company and a 65% reduction in its valuation ahead of the round. This clearly hasn’t stopped some interested parties from investing more money or jumping in for the first time, but it will surely place doubts in some investors’ minds.

It would certainly follow the lead of institutional investors who cancelled a £700 million deal in January due to turbulent market conditions and a growing wariness of high value tech startups.

These are undoubtedly setbacks for a company like Freetrade and it does beg the question whether crowdfunding is being seen as a way to make up for some of the shortcomings left by deals that haven’t materialised.

What fintechs have turned to crowdfunding?

Of course, despite Freetrade’s impressive success in crowdfunding, the fact is theirs is an exceptional case. As far as the companies are concerned, crowdfunding doesn’t always bring in those kinds of consistent returns and even then, the amounts being raised aren’t anywhere near the size of bigger VC deals.

It’s not stopped several bigger companies from going down that route, although few have been as bullish as Freetrade. 

All-in-one banking platform and card, Curve raised almost £10 million in 2021, making it one of the most successful crowdfunding exercises although it didn’t embark on that journey until it had already received some institutional backing and a $250million valuation. Crowdfunding was used as a way of boosting that further and in the wake of their success, the pre-money valuation tripled.   

Moneybox, Qonto and Chip have all had crowdfunding rounds on Crowdcube in 2022 and international payments company Paysend uses Seedrs secondary marketplace to supplement their funding with retail investors.  

Another company keen on crowdfunding is financial assistant app Plum who secured £1 million from investors in the first 8 hours of its crowdfunding round in October 2022.

Other fintech startups currently listed as investment opportunities on Crowdcube are carbon neutral business account Tred and AI powered Investment platform Stratiphy. 

Infographic of fintechs that embarked on crowdfunding and what they raised.
2021 was a good year for crowdfunding success.

Are there other reasons to pursue crowdfunding?

So, what other reasons are there to go down this route and are there any reasons to stay away?

Beyond the possibility of raising capital there are a few other principal benefits to embarking on a ‘Crowdfunder’.

Exposure

An obvious reason for a consumer based fintech to try crowdfunding is that it may also bring your company exposure. It’s an opportunity to further the story of your brand and get press coverage but more importantly it’s a way of entering the conversation. Those initial investors are more likely to talk about your company to others, in order to increase the chances of their investment doing well, and as such attract more people to the party. 

Gaining advocates

Gaining new advocates in this way is also hugely valuable. Rather than simply getting people’s interest in the product, this means potential users have some skin in the game. They are there to support the project at least for the near future. It’s also an opportunity to have a forum of potential users, offering you a different perspective on the product. If you can offer them an opportunity to give feedback on desired features or improvements, it will increase engagement in the product and trust in the company.

More freedom 

Another benefit to the company is what you’re able to do with the funds you gain. Of course, there are certain expectations and pledges to live up to as a condition of asking for people to invest their own capital but there is certainly more creative freedom than with VC money. Whereas that might come with a degree of oversight and targets that restrict what you do as a company, the money from a wide range of individuals could be used to embark on a more flexible strategy. 

When crowdfunding may not be worth it 

There are some serious considerations to be made despite these obvious advantages.

One perspective is that it can’t hurt to try it. The extra funding, potential customer data and exposure could be worth embarking on the project, especially given the current funding landscape.

However, there’s no guarantee that the round will secure the desired funding, rendering the exercise costly, with diminished returns. One source showed that the average rate-of-return for crowdfunding in the UK is ~9%, but it could even be lower when you consider lucrative outliers like Revolut or Freetrade. 

You may also not want to get too close to retail investors. Yes, there is some freedom, but savvy business owners will recognise that there is serious value in getting experienced investors on board. They want their investment to grow just as much as the company and will have the contacts and resources needed to help make that happen. Plus their tastes may be different and importantly informed by experience in the market.

The issue now of course, is that that level of support is harder to come by. In the meantime, crowdfunding could be seen as a way to prove interest in the product and make it a more appealing prospect in future.

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