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DEMOCRATISING FINANCE

Alternative Finance Demystified


July 2015

AGGREGATING DIGITAL INVESTING MARKETS

Volume 1 (Digital Equity Investing): An Overview of the Key Players, Investors and Trends that
are Shaping the New Model of Online Collaborative Funding
Prepared in Collaboration with Leading Alternative Finance Players Globally

About This Research

While researching and analysing the key players and drivers underpinning the digital investment

landscape, the DealIndex team uncovered a whole ecosystem of players that have transitioned into the
online investment space. We realised that these players and how they interrelate with one another have
not been covered before in a comprehensive manner. As such, we have attempted to capture the
interlinkages between the swarm of players in the alternative finance space with this report.
This report covers emerging trends in alternative finance as well as offering an overview of the different
areas of the sector, with a focus on equity crowdfunding in Volume 1. In subsequent reports we will cover
asset classes including real estate and debt in similar detail. Alternative finance is sometimes seen as a
broad and opaque space, through this report we outline how its seemingly disparate parts fit together,
and where the sector as a whole is headed. We begin by reporting our key findings and trends, before
moving on to describing the diverse array of platforms and services offered. We conclude with an
analysis of the changing investor landscape in the sector. This report has been prepared in collaboration
with several disruptive and leading alternative finance players across three continents and is furnished
with many useful case studies. We hope the report elucidates alternative finance for all who may have an
interest in this important and rapidly growing sector.

About DealIndex

DealIndex (www.dealindex.co) is an intelligent data and deal aggregator of private companies and assets
raising capital across leading alternative finance platforms globally. At DealIndex, we take a global,
curated approach to the alternative finance ecosystem. We provide extensive data, research and analytics
as part of our service to clients. For this reason, we are able to provide data and context on many different
aspects of the market. We can offer as much or as little as is required: from a simple, high-level overview
of whats happening now to deeper insight on longer term trends.
Our flagship product (a global crowdfunding aggregator https://dashboard.dealindex.co/) allows
investors to navigate and track deals in real-time, manage their portfolio of private company investments,
and is backed by extensive analysis, data and research. The dashboard provides single sign-on access to
hundreds of private companies seeking capital, bringing together, for the first time, curated, quality deals
from leading equity crowdfunding platforms spanning four continents.
DealIndex is part of The Grow VC Group, a worldwide pioneer and leader in the crowd investing, peer to
peer and online investment market.

Authors and DealIndex Research Team


Michael Cameron
Research and Investment Associate
michael@dealindex.co

Edward Flach
Research and Investment Associate
edward@dealindex.co

Duncan MacDonald-Korth
Director, Research and Sales
duncan@dealindex.co

Neha Manaktala
CEO & Co-Founder
neha@dealindex.co

Tom Walker
Director, Product and Business Development
tom@dealindex.co


Acknowledgements

Collaboration is a cornerstone of alternative finance, and so for this report we have invited our partners to
participate in the production process. Such collaboration will allow our readers unparalleled insights
directly from players across the alternative finance value chain and from across the globe. Sincere thanks
are extended to our 18 global partners who have contributed to the writing of this report. These industry
experts and disruptors are pioneering alternative finance in the markets in which they operate and have
contributed truly unique insights. We have received contributions from alternative finance disruptors
across Belgium, Canada, France, Germany, Israel, New Zealand, the United Kingdom and the United
States.
We are privileged to have first hand insight on the disruption, evolving models and the change each of
these players are pioneering in their markets. It is great to be able to bring all this together so our
readers can gain a better understanding of the alternative finance ecosystem in markets across the
globe: the issuers, the investors, the regulations, the challenges, the similarities, the differences,
constantly changing models, collaboration with the financial services industry, and the rapid pace at
which this market is evolving. These unprecedented insights from players across the ecosystem,
including crowdfunding and M&A platforms, infrastructure, data and technology providers, and advisory
firms, have helped us develop a global and more complete picture of the different parts of alternative
finance and how they work together. We are overwhelmed with the response and are grateful for the
time and effort all of our partners have taken to contribute and participate in this research.

Note From Some of Our Partners


"The digital investing and lending market has grown dramatically in recent years. While the growth is
unprecedented, the market is lacking in fundamental data and insight, the type that DealIndex has set out
to foster. At Crowd Valley, we believe in universality and transparency in this market and through our
digital back office product, we aim at catalysing the markets development through robust middle and
back office tools for operators, as well as for the buy and sell side stakeholders. That is why we partner with
leading stakeholders in the market that have a digitally native approach to the changes and opportunities
in the financial service market." Markus Lampinen, Co-Founder and CEO, Crowd Valley
I was fascinated to preview this report, shows how new thinking is reframing the finance world, some
inspirational stuff and growing scale. Soon, more the new normal than the alternative! Lin Feng, Founder
& CEO, DealGlobe

Contributing Partners

Note From Some of Our Partners


FinTECH (Financial Technology) is revolutionising the capital markets! DealIndex provides valued insights
regarding how companies and investors are leveraging technology to streamline the investment process.
Equity crowdfunding/direct investing has the potential to emulate peer-to-peer lendings (~Prosper)
success as equity investors increasingly migrate online gaining access to premium deal flow at lower
costs. Scott Jordan, HealthiosXchange
"Regulated crowdfunding is the most disruptive form of alternative finance available today. As is the case
for any form of alternative or traditional finance to flourish, regulated crowdfunding requires a cohesive
eco-system and an integrated infrastructure to bring it all together. Seamless infrastructure technology is
the key to integrating the eco-system and ensuring the continued success of regulated crowdfunding. We
are delighted to be able to contribute to this Alternative Finance report on how the eco-system works and
the importance of proper infrastructure" Oscar A Jofre, Founder, President/CEO, KoreConX
We are at the forefront of the crowdfunding industry, leading the efforts to democratise capital for all
entrepreneurs. Jeffrey Fidelman, Head of Investor Relations, Onevest
We were happy to contribute to DealIndex's research, the platform that will become a very useful tool for
us." Grgoire Linder, CEO France, Raizers
While the growth of alternative finance is racing ahead, there has been a dearth of research for those
seeking to gain a deeper understanding of the past, present, and future of this market. DealIndex's report
sheds light on this dynamic and diverse market, providing insight to the digital investment sector, as well
as delving into case studies from various partners in this space. As New Zealand's leading equity
crowdfunding platform, we feel that it's important to contribute to this report and help bring alternative
finance into sharper focus for global stakeholders. Josh Daniell, Co-Founder & Head of Platform,
Snowball Effect
As alternative finance increases in size, so does the complexity of its ecosystem. This report is a gold mine
for anybody looking to gain an overview of the ecosystem and find out who the main players are in their
respective areas. Gonalo de Vasconcelos, CEO and Co-Founder, Syndicate Room
"In order for equity crowdfunding to thrive and develop in to a long term and sustainable asset-class, I
strongly believe that sound investment principals need to be adhered to and the industry needs to
demonstrate that it can consistently deliver returns for its investors in line with the risk they are taking. At
VentureFounders we are not going to deviate from our core principals of providing investors with exciting
and interesting investment opportunities that are appropriately structured for the risk that investors are
taking. This in-depth industry report drills down on various aspects of the alternative finance ecosystem. It
is great to be able to feature our unique insights on the fast growing equity crowdfunding industry. James
Codling, Co-Founder, VentureFounders

Table of Contents
09

Executive Summary: Summary Observations, Key Findings and


A Message from the Founders

20

Introducing the Alternative Finance Ecosystem: Who Are The


Key Players and How Do They Interrelate With One Another

24

Issuers: Investment Activity Moving Upstream

31

Platforms: The Evolution and Emergence of New Platform


Models and Asset Classes

51

Data and Marketplaces: Shifting Towards a More Data Driven


Approach To Investing

58

Infrastructure: The Importance of a Comprehensive Support


System

65

Investors: A Mix of Both Retail and Institutional

74

Conclusion: Looking Forward

CONTRIBUTING PARTNERS
US

AgFunder is the worlds first equity-based investment platform created


specifically to connect investors with world-class agriculture and agtech
investment opportunities from around the globe

Page 41

Bankless 24 is a German crowd investing platform for the SME sector. Investors
can invest in medium-sized companies from 100 euros. Businesses get access
to alternative finance

GERMANY

Page 45

Crowdfundraiser is an expert across the crowdfunding ecosystem, connecting


capital between investors and entrepreneurs. It provides services related to
both debt and equity alongside liquidity solutions for investors and founders

US

Page 50

Crowd Valley powers the future of financial services by providing marketplace


technology and API Back Office solutions. The company enables online
investment platforms; peer to peer lending, equity and debt marketplaces

HK, UK, US

CHINA, UK

Page 62

DealGlobe provides an online platform for investors and corporate


professionals seeking investment and partnership opportunities. The
company's primary focus is on small and medium sized enterprises with the
aim of bridging the information gap between Europe and China

Page 47

Equidam provides a business valuation tool that helps SMEs to manage their
value, investors to achieve the required return and invest in the best ideas, and
early stage companies to grow and prosper

NETHERLANDS

Page 60

CONTRIBUTING PARTNERS
EquityNet has operated one of the largest business crowdfunding platforms
since 2005. The multi-patented EquityNet platform includes over 100,000
individual entrepreneurs and investors, incubators, government support
entities, and other members of the entrepreneurial community. EquityNet
provides access to thousands of investors and has helped entrepreneurs across
North America raise over $330Mn in equity, debt, and royalty-based capital

US

Page 35
Grow Advisors is the consulting and advisory unit of The Grow VC Group. Grow
Advisors offers professional services aimed at growing crowdfunding, crowd
investing and P2P finance around the world

HK, UK, US

US

Page 64
HealthiosXchange is an investment marketplace dedicated exclusively to the
global healthcare industry, employing crowdfunding as the cornerstone of a
new paradigm in healthcare investing, the company offers direct access to the
broadest investment opportunities

Page 48

iAngels is an equity crowdfunding platform that gives accredited investors the


opportunity to become angels in their own right by investing in technology
startups alongside top tier angel investors in Israel

ISRAEL

Page 42

KoreConX supports the crowdfunding and capital markets industry by


supplying the eco-system infrastructure platform (ESIP). The ESIP is utilised for
pre-during-post crowdfunding transactions by facilitating due diligence of
issuers, data repository/deal room and shareholder management/
communications

CANADA

BELGIUM, EU

Page 63
MyMicroInvest is a lending and equity based crowdfunding platform in Europe.
The platform is based on the co-investment principles between crowd and
professional investors and has already facilitated 10Mn investment in over 30
European companies. MyMicroInvest has also developed a system allowing
SMEs to make a public offering online by automatising the prospectus
redaction and establishing a relationship of trust with the Financial Services
and Markets Authority

Page 36
7

CONTRIBUTING PARTNERS
US

Onevest is reshaping the private equity industry by democratising early stage


investing: connecting founders to capital allowing their ideas to transform into
successful companies, simultaneously creating new investment opportunities
for individual investors

Page 37

Raizers is a crowdfunding platform for entrepreneurs. The Pan-European


platform is a collaborative space with innovative features that facilitates the
relationship between entrepreneurs and investors

FRANCE, SWITZERLAND,
DENMARK

Page 38

Snowball Effect is New Zealand's leading equity crowdfunding platform, with


around 75% of market share. This highly curated platform aims to attract the
best quality companies and investors, and is focused on growing carefully to
encourage a sustainable equity crowdfunding market over the long term

NEW ZEALAND

Page 39

SyndicateRoom is an online equity crowdfunding platform that allows its


members to co-invest in exciting companies with seasoned investors. Members
co-invest alongside Business Angels

UK

Page 43

TradeUp is an equity crowdfunding platform for globalising companies, a


rapidly growing and outperforming segment.It helps export-driven companies
to connect and transact with accredited investors

CHINA, UK

UK

Page 45

VentureFounders is an equity crowdfunding platform with a wealth of


investment and startup experience. The company is pushing the boundaries of
what can be achieved in the crowdfunding market by presenting investors with
a range of curated, structured and diligenced investment opportunities

Page 44
8

Executive Summary

Private Investment is Moving Online. While

Private investment is moving online. While


alternative finance started off as a seed stage
endeavour, more recently platforms have begun to
emerge at different stages in the funding cycle,
disrupting traditional institutions

Democratising Finance

Executive Summary

PREFACE: A PARADIGM SHIFT IN FINANCIAL SERVICES


Neha Manaktala
CEO and Co-Founder, DealIndex

Alternative Finance is a new phenomenon, and it is taking the world by storm. With over 1,250 crowdfunding
platforms worldwide, this new model of collaborative funding is breaking boundaries and defying the status quo
as to how issuers source capital. In light of this paradigm shift and plethora of platforms, we perceived the need to
develop an alternative finance aggregator that would instantaneously display quality private investment
opportunities from curated platforms, all in one centralised marketplace.
We embarked on this mission to pioneer an innovative dashboard to address the pain points often faced by
sophisticated investors who are keen to invest in private companies across all corners of the globe. It is throughout
the course of this 12-month journey and vigorous research-driven process that we discovered the relative dearth
of information on this burgeoning sector. This industry report thus aims to offer a comprehensive overview of this
emerging sector, as well as to provide valuable insights on the complexity of the wider alternative finance
ecosystem from various perspectives.
As we set out to develop DealIndex as an alternative finance aggregator, our first port of call was to define the
term alternative finance and to research the key players underpinning this rapidly evolving sector. While
alternative finance is primarily known for crowdfunding and P2P lending, we discovered entire asset classes,
important functions of investment banking, including a supporting ecosystem of due diligence, risk management,
and infrastructure that had transversed the offline and online world of financial services. We started to see how
these seemingly disparate players in alternative finance - involved in different aspects of fundraising, and from all
over the world - are interrelated. Assets including alternatives and M&A, represent significantly bigger (albeit
challenging) asset classes and have started moving online. More importantly, we learned how these players mirror
traditional investment banking services and had already started collaborating with the financial services industry.
Some of the themes underpinning alternative finance include:
1. Increased transparency and access to otherwise closed off asset classes;
2. Redefinition of the term investor across the entire spectrum of private and public asset classes. The crowd
gets access to privileged deals and the worlds largest financial institutions have started investing in companies
much earlier in the life-cycle of a company;
3. Collaboration is a cornerstone of the industry as the syndication model takes hold with mobile, social media
and millennials all generating network effects;
4. Increased volume of funding activity in private companies & assets, and increased amounts of companies
getting funded with customers getting involved in product development / playing a role in innovation as
investors; and
5. How technology, speed, and data have come together to reduce the inefficiencies in searching and accessing
private investment opportunities, thereby saving issuers and investors time in the procurement process.
Alternative finance has already demonstrated its potential to change the way fundraising is carried out by private
companies by implementing a much more democratic, transparent and efficient process for both entrepreneurs
and investors. Issuers get increased access to diverse funding options, while online platforms alleviate the time,
effort and costs associated with fundraising, in addition to generating increased marketing and product
awareness.

10

Democratising Finance

Executive Summary

Having been on both sides of fundraising, it is exciting for me to be


part of the potential to improve the way different aspects of
financial services are performed; all the while deepening
collaboration, not just between alternative finance players, but with
the financial services industry in general

The definition of investors itself has evolved since the advent of alternative finance and the surge of online
platforms. Increasingly, we are witnessing changes to investment behaviour since the start of syndication of
investment online. Furthermore, access to global investment opportunities has led to a more data-driven
approach to investing.
Despite
growing into a $16.4Bn industry in 2014, it is still a drop in the ocean compared to the $3.3Tn
addressable market opportunity. Although crowdfunding is still often dismissed as a niche activity associated with
rewards or donations, the industry has developed into an entire ecosystem that is constantly evolving. Growth has
been exponential with players across the entire funding lifecycle offering diverse and alternative fundraising
options. Most of these alternative finance players already have a significant amount of collaboration with the
financial services world.
Finance is a singular industry with its ramifications permeating every single part of the economy. As an ex-Lehman
Brothers investment banker who witnessed the Great Financial Crisis first hand in 2008, I am constantly reminded
of these important principals. With rapid growth in the alternative finance space, comes the need for increased
maturity in the industry and systems to contend with the unknown and untested impact of changing credit and
interest rate cycles, liquidity squeezes, fluctuating asset pricing and valuations and the impact of the macro
economic environment. Moreover, with increased funding rounds, shorter capital raising cycles, diversified and
changing investor bases in private companies, structured offerings and more sophistication being applied so
early on in the life of a company, comes the need for best practices to be applied from financial services. Due
diligence, risk and portfolio management, research, liquidity channels / secondary market - these are all vital parts
of finance and are now beginning to permeate alternative finance.
Alternative finance is removing information barriers and information inefficiencies that exist in the private market,
opening funding conduits and channeling global liquidity. At DealIndex we take a global, curated approach to the
alternative finance ecosystem. We give you a pulse of the market through the provision of data, research, analytics
and context on the wider ecosystem. The availability of private company data is a game changer and everyday we
are fascinated by the volume of data and patterns that emerge as we observe dealflow going live from different
corners of the world across platforms, asset classes and sectors, all in real-time.
Having been on both sides of fundraising including at Morgan Stanley Investment Banking, Actis Private Equity
and as an entrepreneur, it is exciting for me to be part of the potential to improve the way different aspects of
financial services are performed; all the while deepening collaboration, not just between alternative finance
players, but with the financial services industry in general.
I would also like to extend my grateful acknowledgement and appreciation for all our partners and to those who
have contributed to this report. It would not have reached you in its present form without them.

11

Democratising Finance

Executive Summary

KEY FINDINGS
PRIVATE INVESTMENT IS MOVING ONLINE
While alternative finance started off as a seed stage endeavour, more recently platforms
have begun to emerge at different stages in the funding cycle, disrupting traditional
institutions. Drawn by the increased access to investors that operating online affords,
platforms now make it possible for companies to raise capital at every stage of the
funding cycle online.

ALTERNATIVE FINANCE IS DRAWING MORE


ESTABLISHED ISSUERS

Originally seen as a solution to the long-standing funding gap for early stage
companies that appeared in the wake of the 2008 financial crisis, the ability for
issuers to raise capital more quickly and at a lower cost than would otherwise be
possible at traditional institutions coupled with a host of other benefits such as the
increased marketing awareness and customer loyalty has meant that
crowdfunding is now seen as an attractive option by many issuers.

INCREASING INSTITUTIONAL INVOLVEMENT


As the market grows in size, so too are more institutions investing in the sector. As
much as 66% of the loans originated at Prosper were snapped up by large institutions
in the 3rd quarter last year. Similar figures across other P2P platforms highlight an
increasingly institutional marketplace. While equity investment remains someway
behind the P2P market in this respect, things are beginning to change with more VCs
participating in crowdfunding campaigns. This is expected to only strengthen as more
tools for sophisticated investors emerge.

AVAILABILITY OF DATA IS CHANGING


As the private investment market moves online, the ability to harvest large
quantities of data surrounding investment decisions becomes easier. Furthermore,
tools that allow investors to then analyse the data, uncovering trends, are enabling
more informed decisions. This is a radical change for the private investment
market given its historically closed-off nature.

COLLABORATION RATHER THAN DISRUPTION


Many have wondered if the alternative finance space is set to upend the traditional early
stage investing business model. While this angle is hyped, in reality it is emerging that
venture capital and alternative finance will work side by side. Rather than disrupting,
alternative finance is developing a collaborative and synergistic model. Evidence of this
can be seen in the growth of investor-led platforms, as well as the adoption of digital
finance by major businesses like Goldman Sachs and Metro Bank.
12

Democratising Finance

Executive Summary

INTERESTING FACTS
$3.3Tn

$300Bn

$65Bn

1,250

Alternative Finance
Immediately Addressable
Market Opportunity1

Value of the Early


Stage Investment
Market2

Estimated Revenue
Crowdfunding Added to the
Global Economy in 20143

Number of
Crowdfunding
Platforms Worldwide4

410%

270,000

Equity crowdfunding
average growth rate
2012-20145

Number of jobs
crowdfunding
created in 20143

100M+

351%

Unaccredited
investors in the U.S.

$34Bn

Estimated Crowdfunding
Market 20156

>

$30Bn

VC Industry annual
average6

Increase in quarterly
revenue post equity
crowdfunding

>

$20Bn
Angel capital
annual average6

13

ALTERNATIVE FINANCE: ROLE OF GOVERNMENTS,


STARTUP ECOSYSTEMS AND INVESTORS
Valto Loikkanen

Co-Founder & Chairman, DealIndex; Co-Founder & CEO, Grow VC Group


What role have governments played in the adoption of digital investing and lending in areas where
adoption has been the fastest?
Governments play a very important role in digital investing markets, anyone who innovates spends
significant effort on doing their own risk assessment and due diligence. While its understandable that
laws and regulations typically follow innovation, the most important factors for risk assessment are the
easy availability of information and the clarity of the regulatory environment. When the rules are less clear,
the way the government reacts to innovation is important. For example, in the UK and US, the
governments have led and openly communicated their views on innovations in alternative finance and
how they plan on acting should the market move adversely. It is important to open a dialogue and build
mutual trust between all parties and this approach sends a positive signal to those in this new market.
How do start-up ecosystems across different countries benefit from alternative finance, especially in
attracting international investors and how can data on digital investing and lending benefit start-up
ecosystems?
New digital investing models and related processes accelerate start-up ecosystem knowledge especially
with reference to investment processes and investor expectations. In general, they can help a city or
country to skip a generation of trying to only build or grow traditional offline based risk finance models
like grants, traditional business angel and venture capital models. Furthermore, in mature markets,
business angels and VCs are already moving onto digital platforms and investing alongside the crowd. In
addition by applying digital marketplaces in different countries and cities, one can productively showcase
the best regional investment opportunities in the international market, channelling opportunities to
different audiences beyond the single marketplace itself.
One of the fundamental differences between digital investing and open marketplace models is that,
instead of a company having to limit itself to specific funding instruments rules or limitations, it can freely
structure its offering and then let the market decide if its interesting.

14

Democratising Finance

Executive Summary

The digital finance market is all about better access,


transparency and efficiency..Whenever there are
more options, it is generally a positive thing for
everyone and for any company that has high growth
ambitions, the digital fundraising process forces them
to learn how to communicate with investors early on.
This alone is valuable for the future

What has been the evolution and strategy of the Grow VC Group and why did you and Jouko set it up?
The idea was to help scale entrepreneurship and identify innovations in the context of the recent financial
market failure. We also wanted to harness the power of social networks that brought people to the online
world. Both of us have experienced successes and failures in building innovative companies and have
learned that market timing is key. We could see we were very early to the market and had difficulty trying
to communicate our vision and business model to others. The initial idea for equity crowdfunding was in
the summer of 2008, when Facebook only had 100 million users. The name equity crowdfunding hadnt
yet been coined and as such we had a hard time explaining it. Initially we called it Venture Capital 2.0.
Furthermore, it was hard for many to believe in. It therefore became evident that we would have to
commit to a long journey and approach it globally from the start in order to reach the necessary volume
of users. Today there is a broad scope of opportunities within various alternative finance sectors.
As an entrepreneur yourself, what are the benefits that alternative finance has for start-ups and founders
in the fundraising process?
Overall, alternative finance simplifies things and makes the process more transparent. In addition,
founders also can gain a lot more knowledge about other companies that have used the process before
them. It can be a bit scary to put your business out there as its possible that you may not be successful in
fundraising, but for any genuinely good deal, with a good valuation, that is well structured and with a
good team behind it, it is a very good option. It must be stated that whenever there are more options than
before, it is generally a positive thing for everyone and for any company that has high growth ambitions,
the digital fundraising process forces them to learn how to communicate with investors early on. This
alone is valuable for the future. From a general perspective the digital finance market is all about better
access, transparency and efficiency. This, together with the data that this digital market generates, leads to
ever faster learning and further development of all areas it spreads to.

15

Democratising Finance

Executive Summary

MARKET DRIVERS

ALTERNATIVE FINANCE IMMEDIATELY ADDRESSABLE MARKET


OPPORTUNITY1

DATA AND TECHNOLOGY DRIVES DECREASE IN COSTS AND


INCREASE IN USAGE1

ADVISORY FEES (2014); DECREASE IN


COSTS

CHANGING DEMOGRAPHICS1

INCREASE IN USAGE

4 MACRO ENVIRONMENT14
Low interest rate environment drives yield
hungry investors to alternative finance

Millennials 10X more


likely to use P2P
Lending than Boomers

Millennials already
using alternative nonbank financing

Avg. Yield P2P Lending

Average Interest Rate for


Total Marketable Debt
April 2015
16

Democratising Finance

Executive Summary

MARKET DRIVERS
GLOBAL CROWDFUNDING MARKET4,5
Worldwide Crowdfunding in 2014: $16.2Bn

YoY Growth 2013/2014

DEMAND FOR DIGITAL INVESTMENT OPERATIONS Q420147

NETWORK EFFECTS YIELD EXPONENTIAL GROWTH1

50% Of all Lending Tree/Prosper loans originated


in Q4 2014
17

ALTERNATIVE FINANCE: DISRUPTION OR


COLLABORATION?
Over the last few years, much has been made of the potential for alternative finance to disrupt the traditional
financial industry, including subverting the established bank loan process with P2P lending. Some may
wonder if this will actually be the case, and additionally, whether alternative finance as a whole, will disrupt
the traditional early stage investment industry.
Thus far, it appears the alternative finance market is actually moving in the opposite direction. Rather than
trying to supplant banking and venture capital, a collaborative model is emerging whereby digital platforms
work side by side with traditional investors. This trend is evidenced by a number of developments. There is
an increasing trend towards investor-led platforms. Such platforms allow individual investors to follow the
lead of an accredited investor, showing how traditional financing and alternative financing can work in
harmony.
The emergence of a secondary market for private company shares is making it easier than ever for
institutions to participate in the space. According to media sources like the Financial Times, even businesses
as regulated and traditional as mutual funds are now investing in private companies, such as Uber and
Pinterest. Large institutions are starting to utilise P2P lending as well, with the UKs Metro Bank announcing
that it would start lending customer deposits through P2P platform Zopa. Goldman Sachs itself, widely seen
as the pinnacle of traditional investment banking, has even announced that it will start lending through a
digital consumer-driven platform. All of these points show how rather than disrupting traditional financing
models, alternative finance is developing its own collaborative niche within the industry.

Rather than trying to supplant banking and venture


capital, a collaborative model is emerging whereby
digital platforms work side by side with traditional
investors and financial institutions.

18

Democratising Finance

Executive Summary

GROWTH DRIVERS
REGULATION
Global easing of regulations around the world is opening up the
private investment market to larger numbers of investors. In the US,
changes to legislation allowing for companies to state publicly that
they are raising funds meant that the market was opened up to
accredited investors in 2013. Regulators recently went a step further
and now non-accredited investors have access to the asset class for
the first time under Title IV.

CHANGING INVESTMENT BEHAVIOUR


Millennials desire for fast, seamless user experience coupled with
their preference for online, mobile-first solutions is changing
consumer investment behaviour. Furthermore, they are drawn by
the greater transparency and increased involvement in the
investment process that online funding platforms afford.

INNOVATION
With crowdfundings roots in the donation/rewards based category,
it did not take long for the sector to evolve and incorporate P2P
lending and equity platforms. Furthermore, there are now platforms
at every sector of the funding cycle while other online tools such as
data providers are evolving to compliment the fast moving sector.

CUSTOMER ACQUISITION
Investors are incentivised to share campaigns across their network in
order that the funding target is reached and as such, alternative
finance is an increasingly social market. Furthermore, strong network
effects mean that as platforms draw more investors they will draw
more issuers and vice versa. All this makes it easier for online
platforms to recruit customers than their traditional bricks and mortar
counterparts.

19

INTRODUCTION

If the Alternative Finance sector does reach its


forecasted $34.4Bn in funding in 2015, it will have
surpassed the venture capital industrys $30Bn of
annual funding volume6

Born out of the ashes of the 2008 financial crisis,


alternative finance, which encompasses practices like
crowdfunding and peer-to-peer lending, has grown
rapidly as a means of financing globally. Beginning as
an online extension of traditional financing by friends
and family, alternative finance has given rise to truly
global online communities of investors and issuers,
democratising, globalising and streamlining the capital
raising process.
There are many examples of early crowdfunding
campaigns, but it has been the combination of a
number of factors that has allowed it to grow into the
industry that we recognise today. Technological
advances, namely the advent of Internet 2.0 has meant
that users can enjoy greater interactivity online, while
the squeeze on bank lending and low interest rates
post 2008 have pushed issuers and investors to
explore non-traditional financing and investment
models.

STATUE OF LIBERTY
As the Statue of Liberty was being shipped
from France, efforts by the US government to
raise money for a pedestal for the statue to
stand on had stalled. By the summer of 1885 it
seemed like all options had been exhausted.
Renowned publisher Joseph Pulitzer took it
upon himself to launch a fundraising
campaign through his newspaper the New
York World. He sought lots of small donations
from a large number of people and within 5
months had raised the required $100k from
160k ordinary Americans.
Pulitzer used a single collection point to
collect small amounts of money from a very
large pool of donors and if this was launched
today, the campaign would resemble a
reward/donation based crowdfunding
campaign similar to those run on Kickstarter
and Indiegogo.

Since 2008, individuals and companies have


successfully raised billions of dollars in debt, equity
and donations online. Worldwide, some estimates put
the total alternative finance market at $16.2Bn in 2014,
more than double the $6.4Bn it was in 2013, but still some way short of the $34.4Bn it is expected to reach
this year. If the sector does reach its forecasted $34.4Bn in funding in 2015, it will have surpassed the venture
capital industrys $30Bn of average annual funding volume. Such success has given rise to a new, but still
nascent, digital investing ecosystem of issuers, investors, funding platforms, marketplaces and information
providers that are challenging the traditional players.
Though led by developed nations in a geographic sense, particularly the United Kingdom, the United States
and China, which, according to some estimates make up 96% of the financial return crowdfunding market, no
single region controls the digital investing landscape as we know it today. It operates on a truly global basis.
As with the development of any new financial market, the regulatory environment remains fragmented,
differing across geographies not only in a rule-making sense but also in maturity, clarity and relevancy.
Moreover, funding platforms, service providers and data availability all remain fragmented as well.

21

DI Sphere: Mapping the Digital Investment Ecosystem

22

Democratising Finance

The ecosystem
on the previous page stands to
highlight the various sectors and major players
that make up the alternative investment market.
Whereas traditionally a young company would
look to family and friends for seed capital, a bank
to borrow from, a VC to provide growth capital and
the public markets for liquidity, there are now
online platforms servicing every step of the
funding cycle. Despite the existing fragmentation,
as a whole these players are creating an integrated
digital landscape that serves a specific economic
need: to provide capital to growing enterprises
that do not have access to capital under traditional
finance methods and/or to provide capital in a
more cost effective way than traditional sources.
In effect, alternative finance is removing
information barriers and opening funding conduits
into the private investment market for both issuers
and investors, resulting in a more accessible asset
class. There are added benefits too for

WORLDWIDE ALTERNATIVE
FINANCE4,5

Introduction

entrepreneurs who choose alternative funding


routes over more traditional routes, such as
increased product awareness and a more
developed customer base.
This report aims to highlight and breakdown the
various sectors that make up the overall alternative
investment ecosystem. The alternative finance
ecosystem has evolved over the past decade and
consists of players in differing segments across the
globe including:

Funding platforms: rewards, debt, and


equity
Liquidity platforms
Private placement platforms
Alternative investment platforms
Online M&A platforms
Data and research providers
Back office and support providers
Business intelligence providers

ALTERNATIVE FINANCE IN
EUROPE5

23

ISSUERS

Initially platforms primarily featured young


companies raising seed stage capital at a time when
it was hard to access traditional funding sources, but
now, the industry is moving upstream and is
attracting more established businesses, drawn not
just by the speed and cost savings but by a host of
added benefits too

Democratising Finance

From alternative finance, equity and debt-based


crowdfunding emerged to fulfil an important
portion of a developing SMEs funding cycle known
as the funding or capital gap. Whereas VCs and
even angel investors are increasingly looking for
businesses with a clear path to exit (somewhat a
function of their increasingly traditional investor
bases), excluding the majority of young companies
from funding, equity and debt-based
crowdfunding stands to provide capital to
businesses that are moving from prototype to startup to early growth without forcing them to call
upon friends or family for capital at a stage that is
too early for traditional bank funding. Moreover,
requirements for series A rounds are becoming
higher, forcing companies to raise prior rounds.
Basel III, resulting in new regulations and capital
rules has meant that banks are increasingly strained
in their ability to lend to SMEs. This coupled with
the fact that even small lines of credit are taking
increasingly longer amounts of time to approve has
created a funding vacuum. Specifically, in its
October 2014 Senior Loan Officer Opinion Survey,
the Federal Reserve noted that the majority of
respondents indicated that underwriting policies
on small business loans were tighter than their
average over the last decade. Alternative funding
methods stand to reduce this working capital gap.
Such reduction in time to funding could have

CROWDFUNDING DEALS
BY STAGE 2014/155

Issuers

FACEBOOK ANNOUNCES
ACQUISITION OF OCULUS
RIFT FOR $2BN
In March 2014, Facebook made an announcement
that they were taking over Oculus Rift, the virtual
reality gaming headset manufacturer, for $2Bn.
What made this exit particularly interesting was
that two years prior to the announcement, Oculus
Rift raised $2.4Mn via the Kickstarter platform. In
return for donations, donors were given T-shirts,
posters and for larger donations, developer kits.
While the exit did not reap any financial rewards
for the donors, it further highlights the potential of
investing via crowdfunding.

massive implications for small businesses and


overall economic growth.
Alternative finance platforms ability to reduce this
working capital gap and time to funding has meant
that they are beginning to attract the attention of
larger, more established issuers and that has led to
investment activity moving upstream in the last
couple of years.

CROWDFUNDING INVESTMENT
BY STAGE 2014/155

25

CASE STUDIES
CHAPEL DOWN

JUSTPARK

In October 2014, UK-based winemaker, Chapel


Down Group, raised 3.95 million via Seedrs,
making it the first publicly listed company to
access the public equity markets via
crowdfunding. The funds were raised to promote
growth and necessary investment to support that
growth. Similar to companies raising in the nonpublic sphere via crowdfunding campaigns,
Chapel Down cited the ability to build a
significant body of shareholders as a primary
reason for using an alternative finance fundraising
model.

Earlier this year, JustPark, previously backed by


BMW and Index Ventures, used Crowdcube to
raise 1 million of growth capital at a time when it
would have usually looked to more traditional
funding avenues. JustPark citied one of the key
drivers as being the fact that by giving their
customers the opportunity to invest in the
company it would make them less likely to join
competitors in the future.

LENDING CLUB

MILL RESIDENTIAL REIT

This year, Lending Club has announced


partnerships with both Google and more recently
Alibaba, to whom they will provide small business
loans of up to $300k to US businesses that are
looking to buy inventory from the Chinese
eCommerce site. This is of particular note due to
the fact that Lending Club is replacing an
established, traditional Chinese bank and
highlights the threat traditional lenders face from
this still infant industry.

The Mill Residential REIT became the first real


estate investment trust to utilise the power of the
crowd, when it raised 2.1 million in just three
weeks via Syndicate Room last year. In total they
raised 3.5 million, with the balance coming from
institutional investors. The round preceded a
listing on AIM a couple of months later, giving
investors immediate access to liquidity and was
one of the main reasons that the round was so
well received. Furthermore, the structure stands to
highlight the increasing sophistication that is
becoming prevalent in alternative finance.

NEARDESK

NICOLA HORLICKS

NearDesk, who rent desks and meeting rooms by


the hour around the UK, recently raised 1Mn via
Seedrs. The capital will be used as growth capital
and follows previous funding rounds raised
online. NearDesk saw VCs Juno Capital and
Renaissance Capital take part in the online round.

In 2013, Nicola Horlicks, a highly regarded fund


manager, raised 150k via Seedrs. The money
was sought to allow her to start raising capital for
her first investment fund. Since then, she has
raised follow-on investment via Seedrs, to the
tune of 450k and increased the fund target from
$100 million to $250 million because of investor
appetite.
26

Democratising Finance

Alternative lending has moved on from providing


small-scale loans to consumers and seen
exponential growth since 2010, when the industry
self-imposed restrictions to address default rates that
were sometimes as high as 30%. Their ability to
extend credit in a quicker and more cost effective
manner than traditional banks has meant that the
industry now encompasses more commercial loans
and is providing credit to a growing number of
SMEs.

Issuers

Summary of benefits for entrepreneurs/issuers


of raising money online:

Efficiency
Access to wider investor base
Marketing/product validation
Democratic process
Newfound comfort with investor structure
now in crowdfunding

In equity crowdfunding there is evidence of a similar


theme developing. Initially platforms primarily
featured young companies raising seed stage capital at a time when it was hard to access traditional
funding sources, but now, the industry is beginning to move upstream and is attracting more established
businesses, drawn not just by the speed and cost savings but by a host of added benefits too.
Aside from the aforementioned benefits, early stage companies have reported seeing increased Angel
and VC interest immediately after closing a round through crowdfunding. In a recent study, 71% of
businesses reported that within 3 months of closing a fundraising round that they had either taken on
investment (or were in discussion to) from Angel investors or VCs5.
Other reasons private companies are drawn to raising capital online include the increased marketing
awareness that engaging with funders brings, from becoming more aware of new market opportunities, to
understanding which features resonate with people and gaining insights into competitors. A number of
firms are reported to have even scrapped their marketing plans and completely rewritten them
subsequently.

CHARACTERISTICS OF UK CROWDFUNDING ISSUANCES5

27

Democratising Finance

Issuers

DEALINDEX DASHBOARD INSIGHTS

DEALFLOW STANDARDISED ACROSS LEADING EQUITY


CROWDFUNDING PLATFORMS GLOBALLY

AVERAGE AND MEDIAN DEAL SIZES

28

Democratising Finance

Issuers

DEALINDEX DASHBOARD INSIGHTS

SECTOR ANALYSIS: FUNDING GOALS,VOLUMES, SHARE OF SPEND

29

MICHELLE TANG

Director, Marketing & Business Development, DealIndex


Crowdfunding in Asia Poised for Rapid Growth
The race towards embracing crowdfunding has spread globally. Crowdfunding platforms globally raised a
total of $16.2Bn last year, according to a recent crowdfunding industry report by Massolution, a research firm.
Regulatory reform, international expansion and cross-border deals have helped boost the industry, as has a
tide of investors seeking rewards or equity in return for their cash. Among all the regions, Asia is leading the
race in terms of growth, with a 320% increase in funding volume. With $3.4Bn raised last year, Asia is
experiencing the highest growth in the crowdfunding sector and has surpassed Europe ($3.26Bn raised) to
become the second-largest crowdfunding region. In 2015, crowdfunding in Asia is forecast to grow by more
than double the rate of that in North America.
What are the Trends Driving this Crowdfunding Revolution in Asia?
First, while rewards and equity-based campaigns typically get the most headlines, it is actually lending-based
crowdfunding that dominates the industry: in 2014, it raised $11.08Bn. Part of that, according to Massolution
founder and CEO Carl Esposti, is explained by the strong growth of crowd-based lending in Asia: Surprises
materialising from this years research included the astounding growth in the P2P and P2B lending market in
Asia, stemming largely from the Chinese market.
Other key drivers underpinning the rampant growth of crowdfunding in Asia can be attributable to the
following three factors:
1) Online marketplace popularity (explosion of retail e-commerce). It is estimated for APAC to outspend
North American by $40Bn. In fact, 45% of all buyers worldwide on retail e-commerce come from Asia.
2) Social media penetration and savvy. 52% of social media users and 47.6% of mobile users are from Asia.
3) Success and popularity of crowdfunding. Singapore now ranks in the top ten worldwide for crowdfunding.
Compound this by the fact that two thirds of the worlds global middle class will live in Asia by 2030 with
$3.5Bn coming from emerging economies; crowdfunding in Asia is clearly here to stay and is poised for
even more rapid growth.
Is Asia Ready For Crowdfunding?
Asian markets and regulatory structures are not as sophisticated nor developed as say, the Americas. As such,
this naturally begs the question as to whether Asia is really ready to embrace the crowdfunding tidal wave?
According to Doctor Jeffrey Chi, Managing Director of Vickers Venture Partners and Chairman of the
Singapore Venture Capital & Private Equity Association, the answer is that Asia is absolutely ready to embrace
the crowdfunding movement. It is his view that emerging markets are actually more suitable for crowdfunding
than mature markets. This is because gaps in the marketplace and lack of access to capital are more
pronounced in these markets.

30

PLATFORMS

Over time one would expect a broad swath of


financial services currently carried out at bricks and
mortar institutions to transition to alternative models
as business and cultural support is gained

Democratising Finance

Platforms

The alternative finance, or crowdfunding industry started with the three primary platform models: 1) reward or
donation based models; 2) debt-based models; and 3) equity models. More recently however, given the
industrys ability to successfully challenge more traditional institutions, there has been a number of newer
entrants to the market. They are designed to compliment the existing players and include liquidity and exit
based models, real asset models and wealth management models.
In essence, over time, one would expect a broad swath of financial services currently carried out at bricks and
mortar institutions to transition to alternative models as business and cultural support is gained. This growth
will more than likely mean the market will stratify leading to niche players before an eventual shakeout occurs.
With its roots in donation and reward-based crowdfunding, alternative finance began as a seed-stage
endeavour.

ALTERNATIVE FINANCE ADDRESSABLE


MARKET OPPORTUNITY1

LENDING IS A $1.7TN AVAILABLE


MARKET1

Reward Crowdfunding
Popularised by Indiegogo and Kickstarter, donation-based funding allows users to make donations to
companies or non-profits raising capital in return for an incentive. Those incentives include early access to
products, gifts, or an increased sense of self-worth. Compared to equity and debt-based models, rewards
based crowdfunding applies mainly to firms in the idea or early prototype phase, or organisations that
wouldnt seek traditional financing like not-for-profits. As recently as July 2015, Kickstarter had $1.8Bn in
pledges by 9Mn+ total backers.
Reward based platforms, such as Kickstarter, have proved particularly beneficial to companies who are
developing products. The platforms provide an important portal through which issuers can market their
product directly to consumers, gain feedback on initial prototypes and validate their ideas, essentially derisking the process of starting a business. In turn, this makes it more likely that they will go onto raise
Angel/VC rounds in the future.
However, with the present capital gap for enterprises in both the start-up and early growth phase
discussed above, alternative finance solutions have rapidly moved upstream. No longer are issuers solely
looking for seed capital. Companies in the early stage and growth phase are all tapping funding
platforms as a means to raise capital.
32

Democratising Finance

Platforms

STAR CITIZEN
Since Star Citizen, the video game, initially raised $6Mn on Kickstarter and CIG simultaneously in
2012, donations have continued to come from nearly 750,000 ordinary fans at a steady pace of $1-2
million per month. The end result, one of the largest reward crowdfunded project to date at $52Mn.
The pledges have ranged in size from $36 18k. In return, those making donations get access to
special game features, access to unfinished game versions and other merchandise.
Compared to traditional financing, it appears customers, or fans, like having input in a finished
product. Through their donations, they have a say in development, resulting in a more marketable
finished product.

GLOBAL CROWDFUNDING
MARKET 20144,5

PROJECTED CROWDFUNDING
MARKET GROWTH IN EUROPE4,5

P2P/Marketplace Lending
As it stands, debt-based alternative funding appears more popular with more mature and wellestablished SMEs, many of whom prefer the cost benefits of an alternative-funding model. Currently, the
largest debt-based players include Funding Circle, Lending Club, and Prosper. As evidenced by Lending
Clubs recent IPO, this sector of lending continues to gain traction on both the consumer and commercial
side. This includes more than $9.2Bn of loans issued by Lending Club and $1Bn issued by Funding Circle.
Morgan Stanley estimates that the P2P lending market, which it says is a misnomer because of
increased institutional activity in the space, will be worth $290Bn in five years12.
As the lending market matures and grows further, drawing in more institutional money such as from
pension funds, we expect to see increasing importance placed on good due diligence. This pressure is
also likely to come from regulators as the platforms handle larger amounts of capital and appear in the
news more.

33

Democratising Finance

Platforms

LENDING CLUB IPO


In early December, the peer-to-peer lender, Lending Club, debuted on the New York Stock
exchange to strong investor support. On its first day of trading, valuation climbed north of $9Bn,
putting it on par with much larger financial institutions by assets. While this is an
accomplishment in and of itself for Lending Club, it also serves as a sign that alternative finance
has arrived to the mainstream.
Ultimately, it remains to be seen if Lending Clubs goal of transforming the entire banking
system from a transparency and efficiency perspective comes to pass, but its IPO certainly
added credibility to its cause and the greater cause of alternative finance.

UK MARKET BY TYPE OF
PLATFORM 20144,5

UK AVERAGE GROWTH RATE BY


TYPE OF PLATFORMS 2012-20144,5

Equity Crowdfunding
Equity Crowdfunding has been on the rise for some years, with the UK leading the charge. Other
countries, like Australia and New Zealand also made early regulatory moves in the area. Both the US and
UK began discussing crowdfunding rules in 2010, but the UK has been faster in allowing broad public
access. In 2013, with the passing of the JOBS Act in the United States, equity crowdfunding was made
available to accredited investors. Numerous platforms have emerged to serve this market segment and
there is now an increasing array of companies at various stages of the funding cycle and operating
different business models. These include businesses in the growth equity, private placement, M&A,
secondary, and wealth management markets. These platforms are now able to provide a holistic
solution for businesses at all stages of the funding cycle. Equity crowdfunding models provide young
businesses with a platform that allows them to reach a wide range of investors.

34

PARTNER CONTRIBUTION

EQUITYNET

Platform: Equity Crowdfunding


Country: United States

Founded: 2005
Funding provided to date: US$330Mn+

What are issuers looking for from crowdfunding providers? What are the key value propositions?
Issuers are looking for market appeal and validation. They need crowdfunding providers that can provide
them with tools to refine their offerings so they can present them in a manner that is appealing to a large
number of investors who may be interested in their companies. Value propositions such as business
planning and analysis solutions, document hosting and sharing capabilities, and social media integration
methods are vital to accomplish this task.
What has been the feedback from the angel and VC market on your platform? Are there any features you
are keen to add, or modify, based on the feedback?
Angels and VCs want the ability to quickly and efficiently screen deal flow. Our system is designed so deals
are categorised by automated, unbiased, and patent protected indicators. Angels and VCs can see a rating
of each deal based on dozens of attributes so they can quickly find the ones that meet their investment
criteria. They are also provided with data regarding progress towards a companys funding goal which
includes pre-money valuation, funding raised so far, a percentage of how much ownership is for sale,
current funding commitments, and funding raised in the past. All investors on our platform can also request
any documents that pertain to an issuers fundraise at any time. This includes the results from our Enterprise
Analyzer software which highlights abnormalities in the companys business plan, benchmarks the
company against its peers within its industry, and provides a host of other financial analytics presented in a
standardised format.
What are the current liquidity characteristics of the equity crowdfunding market? How do you see this
evolving over the coming months and years?
There currently are not any liquidity characteristics of the equity crowdfunding market in the US. Some
current regulations require a holding of securities purchased from private placements. Investors can be
required to warrant they are not investing for trading purposes, so investments made through
crowdfunding are considered long term by many. New regulations, however, may reduce transfer
restrictions, which will lead to a general movement towards a secondary market. Companies such as
WealthForge have taken great steps towards liquidity by working with CUSIP Global Services to create a
standardised database for private investments by issuing unique alphanumeric codes to private securities
sold within the crowdfunding industry.

35

PARTNER CONTRIBUTION

MYMICROINVEST

Platform: Lending and Equity Crowdfunding


Country: Belgium, EU

Founded: 2011
Funding provided to date: 10Mn

What are issuers looking for from crowdfunding providers? What are the key value propositions?
Through crowdfunding campaigns, issuers are looking to increase brand awareness, accelerate global
fundraising and create communities that can help them to grow their business. Crowdfunding campaigns
bring a lot of visibility (press, events and online marketing) to companies. Furthermore, after the campaign
finishes, companies can expect the investor community to continue to promote the company, buy the
product, advise the entrepreneur and share with their network.
Our key value proposition is to help European SMEs to scale by making pan-European public placement
affordable. We are headquartered in Belgium but we operate across the EU and are currently raising funds
for French, German, Belgian and Dutch companies.
What are the characteristics of the investors you are, or expect to, work most closely with?
We have 3 different types of investors:

Unaccredited investors, who invest on average 700 per transaction.

Business Angels and sophisticated investors who invest an average of 45k per transaction.
VC Funds who invest up to 200k in a deal.
What has been the feedback from the angel and VC market on your platform?
Angel and VCs investors like the fact that MyMicroInvest publishes an information memorandum or
prospectus for each new transaction on the platform. Professional investors want to leverage their
investment alongside the crowd, who validate the company concept/offer and also like that companies can
capitalise on their community to promote the business in the long term. MyMicroInvest offers a simple and
efficient crowdfunding solution to issuers by pooling all crowd investors in one single investment vehicle.
The simplicity of the structure, whereby all crowd investors are pooled into our investment vehicle instead
of investing directly in the target company is an attractive feature.
What do issuers see as the main benefit of listing on your platform?
MyMicroInvest actively promotes each company by doing lots of offline and online marketing such as live
crowdfunding events. We also have partnerships with major banks such as BNP Paribas, Fortis and
KeyTrade Bank. Furthermore, we can help issuers to connect with sophisticated investors such as Angels
and VCs.
What are the current liquidity characteristics of the equity crowdfunding market? How do you see this
evolving over the coming months and years?
The current liquidity of the equity crowdfunding market is low even though our investors can transfer his/
her share(s) to a third party. We believe this situation will quickly evolve since stock markets are willing to
list our titles on their market.

36

PARTNER CONTRIBUTION

ONEVEST

Platform: Equity Crowdfunding


Country: United States

Founded: 2010

Over the past five to ten years the landscape for alternative investing has changed greatly due to technology.
Crowdfunding platforms have facilitated a massive influx of capital to early stage/seed stage companies
including technology, real estate and everything in between. Traditionally, founders had to approach
individual venture capital firms, angel associations and other institutional sources one at a time and wait for a
response regarding either the investment size or valuation. What we have successfully done at Onevest is not
only enable entrepreneurs to go out and raise money through the traditional sources as mentioned above,
but employ fundraising tactics such as equity crowdfunding. At Onevest we do not act as a replacement but
as a supplement to their fundraising efforts. Technology has enabled entrepreneurs to reach out to a wider
audience in a shorter amount of time to not only showcase their product but to also raise funds.
Issuers look for a platform where they can successfully meet or exceed their fundraising goals. They look to
us to perfect their pitch and to understand the general investing landscape. In regards to key value
propositions, when it comes to fundraising, the CEO or co-founder has one of two choices, they can either
continue to run their business, or go out for 6-9 months and exclusively focus on fundraising. It is near
impossible to do both simultaneously and that is why we see such a large value proposition as an equity
crowdfunding platform.
Digital investment services are not new, there are companies such as, Charles Schwab, E*trade, Fidelity and
basic brokerages that offered their services online. What Onevest is doing is democratising private
placement capital. What that means is that founders are able to go online and start fundraising ideas.
Individuals out there, as long as they are accredited investors or more recently non-accredited with the
passing of Title IV, can now participate in those companies that they have been reading about over the past
10-15 years, that have been going public and not been able to participate until they are publicly traded.
Onevest focuses primarily on tech enabled companies but there are other crowdfunding platforms that
fundraise exclusively for real estate, biotech and other company types. We chose tech companies because
we have an advisory base that are well known amongst the early stage investment community and we are
therefore able to execute a vigorous due diligence process on each company.
We have seen investors all across the field from doctors and lawyers to small business owners, former
entrepreneurs and real estate developers. Furthermore, the investors that commit the highest level of capital
seem to be very knowledgeable about the specific sector that they are investing in. Angel groups often look
to us for the due diligence. Every company has a full due diligence report, financial records, pitch deck and
all necessary collateral for an angel or an angel group to make an educated decision on whether or not he or
she will make an investment into that company. Regarding VC firms, we have been able to form strong
partnerships with them due to our vigorous due diligence process. We are able to provide both groups with
quality deal flow that they would otherwise not be able to filter through any process.

37

PARTNER CONTRIBUTION

RAIZERS

Platform: Equity Crowdfunding


Country: France, Switzerland, Denmark

Founded: 2014

We recently spoke to Raizers a Pan-European equity crowdfunding platform located across France,
Denmark, Switzerland, and with intentions to spread throughout Europe. They help companies to raise
between 50k to 1m.
Raizers is the only French crowdfunding platform with a European dimension, with offices located in Paris
(France), Lausanne (Switzerland) and in Copenhagen (Denmark). The issuers benefit from this cross-country
community through the global vision they have and the help they can give while expanding abroad.
Most of their investors tend to already be consumers of a product, or will be post-investment and act as
brand ambassadors who can provide the companies with important feedback. In France a lot of their
investors are attracted because of the tax exemptions for equity investors, while debt investors tend to
purely be looking for higher returns than other avenues.
VC and Angels are also important to Raizers, who solicit them at the beginning of the round, as the crowd
is more likely to invest if the round is subscribed to already. As with many other platforms, Raizers noticed
that it was easier to incentivise the crowd to invest when 30% of the financing objective was already
realised.
Liquidity still remains a concern for the equity crowdfunding market in Europe, as it does for most people
in the sector. Raizers tends do deal with this through tag-along and drag-along clauses, or even calls
integrated into the shareholders agreement.

38

PARTNER CONTRIBUTION

SNOWBALL EFFECT

Platform: Equity Crowdfunding


Country: New Zealand

Founded: 2012
Funding provided to date: NZD8Mn+

Previously, we talked with Snowball Effect, a crowdfunding platform based in New Zealand where
securities law has been overhauled and a new equity crowdfunding framework was installed in 2014.
Now, Kiwi companies can raise up to NZD 2Mn publicly over a rolling twelve month period.
Snowball Effect was one of the first equity crowdfunding platforms in New Zealand to be granted a license
in July 2014, and the industry certainly remains in its infancy. However, success has already come for
Snowball Effect. To date, issuers have raised in excess of NZD8Mn at an almost 100% success rate via
Snowball Effects platform. The largest was Invivo, one of New Zealands fastest growing wine brands,
which raised NZD2,000,000 (maximum possible in New Zealand) through Snowball Effect.
Snowball Effects strategy is to showcase a range of companies from New Zealand to test and grow the
awareness of equity crowdfunding in its corner of the globe. Other successful raises to date through
Snowball Effect include Renaissance Brewing (beverage sector), The Patriarch (first major feature film in
the world to be funded through equity crowdfunding), Carbonscape (cleantech sector), Aeronavics
(advanced aerial solutions) and Breathe Easy (pharmaceutical company), Red Witch (guitar and bass
effects pedals company) and Punakaiki Fund (invests in early/growth stage NZ businesses). Snowball
Effect has also raised funds successfully for two private offers and expects private offers to increase over
the next 12 months.
Similar to global peers, Snowball Effect takes a multifaceted approach to evaluating issuer applications.
Selection criteria includes: (1) performance, (2) markets and product advantage, (3) growth, (4) capability,
(5) governance, (6) financials, (7) legal, and (8) pre-committed funds/networks. In its words, companies
looking for growth or expansion capital are in its sweet spot, as they can benefit best from the brand
exposure and support brought by a public equity crowdfunding offer.
The Executive Director of CarbonScape provided his feedback on the process of raising funding through
Snowball Effect:
Equity crowdfunding has been an absolute life saver for our small start-up CarbonScape Ltd. Despite two
distinguished international awards for our technology we could not escape the narrow limits of New
Zealand's "eligible investor" criteria. In one of their best moves the Government changed all that with the
April 2014 Financial Markets Conduct Act. Suddenly there are platforms like Snowball Effect
acknowledging the right and maturity of ordinary mum and dad Kiwis to make their own assessments of
commercial risk in equity investments. 207 mostly New Zealanders invested an average of $3,850 and the
company raised $764,302, well above our $400,000 target.

39

Co Investment Models
More recently hybrid, co-investment models focused on early stage issuers have emerged, pioneered by
OurCrowd and VentureFounders. These platforms allow investors to co-invest alongside the co-investment
funds they manage and more traditional VC investment and differentiate themselves by their level of due
diligence and investment management expertise.
OurCrowd, for example, have channelled around $130Mn into 70 companies with plans to invest another
$100Mn by the end of 2015. They have a 50 person due diligence team that vets deal before they are
presented to investors and invest between 5-15% of the funding in every deal13. They recently invested in
ReWalk Robotics, an exoskeleton company that helps disabled people to walk, who having listed recently,
have a market cap of around $160Mn.
Investor-Led/Syndicate Models
Investor-led platforms, adopted by AngelList in the US and SyndicateRoom in the UK form syndicates around
accredited lead investors, whereby the lead investor must invest their own money, negotiate the terms and
then invite other investors to join under those same terms, (lead investors also carry out the diligence which
provides comfort to the syndicate, this model has resulted in investment from non-traditional sources of
private company funding). The idea of both platforms is to open up the deals that the top investors are
investing in to the online community and continues our theme of broadening the scope of the private
market.
This platform model gives other investors peace of mind by investing alongside professional investors, with
the platforms benefiting by taking a slice of the carry on deal. This emerging model also highlights the
increasingly collaborative relationship that exists between alternative finance and the traditional investing
community. Rather than trying to replace the traditional VC-led funding paradigm, alternative finance is
developing a symbiotic and mutually beneficial relationship with the angel and VC community.
Niche Platforms
The increasing proliferation of platforms in recent times has meant that a number of new entrants to the
market are choosing to specifically target niche sectors. This has been the case with Trillion Fund, who
concentrate on clean-tech investment opportunities; AgFunder, who follow a syndicated investment model
and operate in the $6.4Tn Food and Agriculture industry and TradeUp, who focus on export driven
companies.

40

PARTNER CONTRIBUTION

AGFUNDER

Platform: Equity Crowdfunding


Country: United States

Founded: 2012
Funding provided to date: $20Mn

Agriculture is a $6.4Tn market employing roughly 1.3Bn people around the world. It has outperformed all
other sectors but one over the past 15 years, yet there are few avenues for investors to access this asset class
and few investors have exposure to agriculture in their portfolio. One reason its been so difficult for investors
to access agricultural investments is because the industry is highly fragmented. Current investment figures
indicate that agriculture needs $200Bn in annual investment in growth and innovation just to keep pace. The
lack of funding and cohesiveness across the agriculture industry presents a serious problem because current
agricultural production capacity must grow by as much as 70 percent by 2050 in order to supply a global
population of over 9 billion people.
The next wave of agriculture will look fundamentally different due to the new technologies now available in
this sector, like drones, autonomous vehicles, indoor agriculture operations, and more. Investors looking for
exposure to long term trends like population growth, protein consumption, and climate change are
increasingly searching for opportunities in pure-play agriculture or in agriculture technology companies.
AgFunder seeks to play a central role in facilitating the funding, access to investment, and ecosystem
development for the industry as it enters this next generation. The company has directed nearly $20M in
investment into agriculture and agtech companies, with that figure set to double this year.
To help facilitate investment, equity crowdfunding - and technology generally - is key to enabling investment
on a global scale. First, crowdfunding offers important procedural benefits. One of the most obvious is the
reduction in time that it typically takes to raise funding. A crowdfunding platform offers a much faster way to
attract and secure capital. The costs and expenses associated with running a crowdfunding campaign are
often significantly less expensive than pursuing funding through a traditional channel. For investors, it offers a
shorter investment cycle by providing access to curated deals, transparency, centralising company
information and documentation, and enabling electronic investment.
A crowdfunding platform with vertical focus like AgFunders allows both companies and investors to selfselect around a particular topic and for AgFunder to provide added value and expertise for both parties.
Issuers target a curated list of investors who possess industry knowledge, domain expertise, or are simply
interested in investing in the space. All of this takes place on a platform that removes key geographical
constraints, magnifying the community exponentially.
Currently, AgFunder has over 5,500 registered members. Roughly 1,300 of those members are accredited
investors, with over 45% of them coming from venture capital firms, family offices, private equity firms, and
even sovereign wealth funds. In addition to pure fundraising functions, AgFunder has also established and
continues to cultivate an ecosystem for investment in agriculture. Through its affiliate news site
AgFunderNews, investors, partners, experts, corporates, and media outlets interested in food and agriculture
technology can learn about new innovations, industry developments, and funding news.

41

PARTNER CONTRIBUTION

IANGELS

Platform: Equity Crowdfunding


Country: Israel

Founded: 2013

How have you leveraged crowdfunding in the angel investment market?


Equity crowdfunding is the platform that allows us to do our business. It enables us to get our research
across to an international community of investors, and provide them with everything they need in order to
make intelligent investment decisions in Israeli startups.
What have been the keys to the success of your business model?
The key to our model is the alignment of interests between ourselves, our investors, and the lead angel
investors we have partnered with. Investing alongside local lead angels with a proven track record and
skin in the game, international investors can be assured that they are gaining access to the most exclusive
deals the market has to offer and coming in on terms these angels have negotiated for themselves.
What has been the feedback from the angel and VC market on your platform?
We are viewed as complementary partners. Angel investing as an industry is based on syndication, and
VCs and angels alike want to invest alongside added value partners they trust and like to do business
with. iAngels allows the VC community in Israel to close rounds faster and more efficiently by bringing
capital and insight from abroad.
What is the value proposition of performing thorough due diligence on the behalf of investors?
Angel investing is not the kind of business where you can simply invest passively. Investors need to be
selective, diversify, and conduct their own due diligence. Most people, however, do not have the time to
make it their full time job, especially in a foreign country. This is what we provide and we love what we do.
Our investment team works day and night in order to provide our investors with the best deal flow and
investment experience.
What are the characteristics of investors that are most likely to use your platform?
Our investors are sophisticated business people and see us as their investment arm in Israel.
What deals do you invest in?
Mobile, enterprise software, fintech, SaaS, consumer applications, big data, robotics.

42

PARTNER CONTRIBUTION

SYNDICATEROOM

Platform: Equity Crowdfunding


Country: United Kingdom

Founded: 2012
Funding provided to date: 29Mn+

Enabling the crowd to co-invest with professional investors is a game-changer for the angel investment
market and a clear sign of how much the industry is maturing. As the driving force behind the initiative in
the UK, equity crowdfunding platform SyndicateRoom is uniquely positioned to comment on both the
benefits for the crowd and the response from angels and VCs.
SyndicateRooms approach differs from the more traditional company-led equity crowdfunding model by
putting the emphasis firmly on investors. Instead of the investment-seeking company deciding its own
valuation and setting the terms of investment, under the investor-led model, a professional investor
negotiates the deal and the crowd is then able to co-invest alongside them under the same economic
terms.
The validation of having professional investors carrying out their own due diligence first and investing large
sums of money into the deal is the key differentiator with the investor-led model. As its a more curated
approach, poorer quality investment opportunities are weeded out - a case of quality over quantity. This
and the fact that the crowd can invest just 1,000 alongside professionals investing much larger sums have
been the keys to the success of SyndicateRooms business model.
The SyndicateRoom crowd tend to be sophisticated and high net worth investors investing an average of
15,000 into each round. This is well above the amounts that the general equity crowdfunding investor
typically invests. However, the platform also has many members investing towards the lower end of the
scale as they know that whether they invest 1,000 or 1Mn they will still get the same class of shares and
same share price as the professional investor.
One of the key attractions of SyndicateRoom for issuers is its members. Their endorsement of the investorled model has meant that SyndicateRoom has successfully closed over 80% of all the rounds it has listed.
Issuers are also reassured by knowing that they are getting sophisticated investors that have the ability to
follow their money when the next funding round comes.
In addition, for more sophisticated deals, it is important for issuers to have an audience that understands
complex investment opportunities. With 33% investments in life sciences, 25% in engineering and 25% in
B2B, SyndicateRoom members clearly have an understanding and attraction for sophisticated deals. The
majority of deal sizes on the platform are in the 250k to 2Mn range.
SyndicateRoom works with over 30 angel networks throughout the UK, helping them to leverage their
investments. Feedback from the angel and VC market about the platform has been excellent. Some VCs
have requested the addition of reporting tools that comply with their internal processes but as each has
their own differing set of rules and requirements this can become too challenging.
Judging by the response from both the crowd and the angel and VC market thus far, it appears that the
investor-led model of equity crowdfunding is set to go from strength to strength.

43

PARTNER CONTRIBUTION

VENTUREFOUNDERS

Platform: Equity Crowdfunding


Country: United Kingdom

Founded: 2013
Funding provided to date: 9Mn+

VentureFounders was established with the aim of bringing a curated offering of venture capital and angel
style investments to investors in an efficient and cost-effective way. We launched in 2014 to offer a more
bespoke and professional service, both to businesses looking for finance through crowdfunding, and to
investors wanting to diversify their investment portfolio.
The teams extensive experience in corporate finance, private equity, deal structuring and start-ups means
we are well placed to identify the businesses that meet our criteria i.e. those with potential for growth and
profit, a sustainable competitive advantage, a clear path to commercialisation, a strong management
team and viable monetisation options. Our team is complemented by a Senior Advisor panel of industry
leading experts and entrepreneurs including Justin Urquhart Stewart, Founder of Seven Investment
Management and Martin McCourt the ex CEO of Dyson.
VentureFounders is much more than a crowdfunding platform. We offer long-term advisory services and
partnership to the businesses seeking funding and provide access to a curated range of well-structured
early stage and growth capital opportunities for investors. We screen all of the investment opportunities
on our platform, conducting detailed due diligence before presenting to our investor base. All of this vital
information is presented on our website for investors to see.
We believe that the role of crowdfunding shouldnt end just because the investment round has
completed. We create long-lasting relationships with our investment businesses, checking in throughout
their growth cycle, often taking a board observer seat and providing regular updates to shareholders and
helping to maximise returns on their behalf.
VentureFounders will typically work with sophisticated and High Net Worth investors who have already
established a diverse portfolio of investments and are interested in angel style investments at a level that
is much more accessible and affordable. Our entry-level investment is 1,000. The reason that we set this
minimum is that we believe this is an appropriate minimum threshold for more serious investors looking
to self-select their own portfolio whilst also indicating a suitable level of risk appetite.
Our current investors are a mix of backgrounds but in general there is a South East and London bias. The
profile of investors who may find our platform is right for them will range from highflying city
professionals, through to the adventurous retiree, through to successful entrepreneurs seeking to support
the next generation. We expect to appeal to any HNW investor from across the UK and possibly in to
Europe in the coming years.
VentureFounders is aimed at growing businesses that have already demonstrated early signs of strong
potential. The company must be UK-based and in terms of deal size, looking to raise between 250,000
and 2 million. We are open to any industry sectors. Typically between one and three years old, they will
be up and running with a strong management team in place and a detailed business plan. The businesses
that VentureFounders works with tend to value the in-depth support and guidance throughout the
fundraise process as well as access to a mix of supportive investors and senior advisors who can open
doors and introduce valuable networks.
44

PARTNER CONTRIBUTION

BANKLESS 24

Platform: Equity Crowdfunding


Country: Germany

Founded: 2012

Bankless 24 is the first crowdfunding platform in Germany for small to medium sized businesses. We
caught up with them to discuss their business model, which is unique in that they offer a mezzanine
product. The reason for this is that the funding gap in Germany for growth financing means companies
are battling a declining equity ratio, which impacts their credit score and the mezzanine product is
designed to solve this issue.
Their investor base is composed mainly of private investors, although more recently institutional investors,
such as family offices, have started to invest. For Bankless 24 to reach their transaction targets of 1 - 5
Mn, these institutional investors are needed.

PARTNER CONTRIBUTION

TRADEUP
Platform: Equity Crowdfunding
Country: United States

Founded: 2014

TradeUp are taking a unique approach to crowdfunding by focusing on export driven enterprises. They
noted that investors in the US are slowly becoming alert to the fact that companies must become globally
minded earlier in their life. With technology companies now being born global, record numbers of mid
sized businesses are looking towards international expansion in order to tap new revenue sources. As a
comparison, European companies that operate in comparatively smaller countries have always had to think
about international expansion from a very early stage in order to maintain growth.
The reason for this focus is down to the fact that leading research all points to exporters outperforming
peers who are domestically focused. Exporters tend to employ better, more productive staff who are, as a
result better paid. TradeUp cite these businesses as out-performers in terms of revenue, productivity and
stability and stand out assets offering a unique portfolio diversification strategy.
As crowdfunding platforms work at reducing the funding gap that exists, TradeUp is targeting funding at
least 200 US companies in the next two years. Feedback from issuers on the platform has been positive
with value added activities such as a list of best-fit investors, contacts for exporting and access to broker
dealer services all being well received.
TradeUp, is a Grow VC Group Company.
45

Democratising Finance

Capital Equity Platforms


Growth
Out of the movement upstream by issuers,
platforms focused on raising capital at the growth
stage of the funding cycle are beginning to
appear. Raising larger ticket sizes of between of
$2-50Mn, players include ASSOB, OfferBoard and
Healthios Xchange, who have raised $350Mn for
clients and focus on investments in the health
industry.
OfferBoard, has a wider scope and recently
featured a Series B financing round from medical
device company Atlas Spine which comes after
previous financing of $8.5Mn via more traditional
sources. Most of OfferBoards clients are
traditional middle market firms and on average
raise between $810Mn through the platform.
Private Placement Platforms
Private placements have also started to move
online. Ace Portal, Axial Ventures, which has
secured $20Mn in funding, and Venovate are all
disrupting the private placement market by
providing platforms that connect family offices
and high net worth individuals with opportunities
to invest in hedge funds, PE funds, energy
projects or other opportunities.
Venovate claims to have a total audience of
330,000 accounts totalling U$17Bn in assets,
while the NYSE took a minority stake in ACE
portal in 2013, signifying the potential this
category has.

Platforms

Alternative Assets Platforms


Funding platforms ability to raise capital in a more
efficient manner through better access to
investors and their ability to disrupt traditional
firms has led to the emergence of alternative
investment platforms replicating the model. Firms
such as Darc Matter, iCapital Network, and Palico
are all bringing together wealthy investors and
private equity funds through the use of
technology.
iCapital Network is supported by placement
agents from Credit Suisse and Blackrock and is
opening up access for single investors to private
equity funds, at lower costs and much lower
qualifying amounts than would otherwise be
possible at traditional banks. iCapital Network
expected their aggregated qualified investor
assets to reach $850Bn by the end of 2014.
Online M&A Platforms
The Mergers and Acquisition market has also
benefitted from technological innovation as
companies such as Intralinks Dealnexus and
DealGlobe bring dealmakers together from all
parts of the world, streamlining and speeding up
the deal making process. DealGlobe is a new
platform specifically developed to connect
European businesses with Chinese capital at a
time when Chinese foreign investment is strong.
While, Intralinks Dealnexus, arguably the largest
online M&A platform, showcases deals from more
than 3,300 investment banks and advisory firms.
In a recent study, 55% of the M&A professionals
questioned confirmed they used online platforms
to support the M&A process. We can only expect
this figure to grow as Millennials start to move up
traditional banking organisations.

46

PARTNER CONTRIBUTION

DEALGLOBE

Platform: Online M&A


Country: China and United Kingdom

Founded: 2013

The majority of online M&A activities have been quite basic, offering little more than online promotion.
Buying or selling businesses is complex, especially cross-border, requiring significant offline activities and
as a result there have been very few genuinely executional platforms, meaning that until recently the M&A
space for SMEs in particular has been relatively lightly affected by digital.
Addressing this was the inspiration for DealGlobe. Whilst businesses and sectors have similarities every
business sale or investment strategy is individual and generally has numerous parties involved.
Additionally, the procedural, regulatory or compliance requirements of markets are different. These
factors mean that to create a truly end-to-end digital business model for M&A and capital raising, you
need to combine both online and offline capabilities.
Our approach, therefore, has three key elements:
First, the online platform automates and deepens the more standard parts of the process, with a
proprietary algorithm to support business match making and analytics to assist with sector and
individual business level decision-making, with the internet enabling global reach.
Second we have a centralised infrastructure that drives product development as well as providing
remote support for specific business situations from specific analytics through to accessing global or
local industry experts a digitally enabled and scaled virtual consultancy.
Third, we have Deal Partners, a global network of M&A professionals who provide the offline
executional support with their local process & compliance knowledge.
Online platforms provide efficiency via a lower cost, by increasing the reach of dealmakers. This is valid
intra-market (UK-UK) or region (EU-EU) but it also helps close the knowledge gap across regions (EUChina, EU India..).
The core value proposition is in the fragmented and less developed SME marketplace, but the platform
also compliments traditional investment banking, where the scalability and configurability gives users a
choice of how to utilise the platform. Already many large organisations are engaged as corporate deal
partners.

47

PARTNER CONTRIBUTION

HEALTHIOSXCHANGE
Platform: Equity Crowdfunding
Country: United States

Founded: 2010
Funding provided to date: $350Mn+

What are issuers looking for from crowdfunding providers? What are the key value propositions?
Issuers seek providers leveraging offline (one-on-one meetings) and state-of-the-art online technologies assisting
with identifying, connecting, closing and managing investors post-close. Technology is critical for engagement (i.e.
matching investors with companies via market sector/geographic proximity) and streamlining the investment
process (evaluation and diligence of premium deal flow, accredited investor verification, eSignature, payment
processing) making it easier to raise capital from alternative sources including accredited investors. However, given
healthcare is still largely institutionally driven/funded, it is important for issuers to evaluate whether providers have
access/connections to traditional forms of capital (venture capitalists) to meet overall capital needs (average pharma
company raises over >$50Mn prior to approval).
Could you provide perspective on the healthcare investment market and the role HealthiosXchange is playing?
Healthcare is one of the more challenging market sectors to raise capital online (vis--vis real estate or early-stage
technology) given the industrys capital intensity, inability to provide yield, and multitudes of risks including clinical,
regulatory and commercial. Leading healthcare providers including HealthiosXchange assist companies from Seed
to Exit raise capital directly from investors on a no carry basis. To date, 3,000+ emerging growth company
executives, investment professionals, strategic buyers, and accredited investors have joined HealthiosXchange. Over
600 companies actively participate including centralising their investor relations activities, connecting with
HealthiosXchange members (friend, follow message, share), and raising capital via 506 (b) and 506 (c) general
solicitation.
What are the characteristics of the investors you are, or expect to, work most closely with?
Many HealthiosXchange investors are former pharmaceutical, biotech, healthcare services, and medical device
executives. We encourage issuers to connect with these investors and their respective networks (i.e. former work
colleagues) via Messaging Friending, persuading them to Follow company pages and receive catalyst updates.
Similar to angel networks/groups, companies build virtual networks of followers/investors who can work together to
perform company due diligence. For investors without the background or ability to do this, many companies provide
attractive investment minimums so investors can diversify their private equity allocation across a number of
companies.
What has been the feedback from the angel and VC market on your platform?
The feedback has been mostly positive. Institutional capital sources are intrigued by FinTECH (Financial Technology)
innovation and are participating including building relationships with alternative sources of capital (family offices,
accredited investors), and sourcing premium deal flow. 600 investment professionals (venture capitalist) are currently
members of HealthiosXchange.
What are the current liquidity characteristics of the equity crowdfunding market?
Most attempts at forming secondary markets (i.e. SecondMarket) have been challenging given the overall market is
fairly small (estimated to be $35BLN in 2015) compared to the >$1Tn in Reg D industry. Over time we expect to see
more established secondary markets and integration with primary markets (Initial Public Offerings, IPOs) whereby
companies can readily access liquidity pathways as evidenced by HealthiosXchanges recent partnership with
Clearbridge Accelerator and SGX launching Capbridge.
48

Democratising Finance

Platforms

Liquidity Platforms

Until recently, a major drawback of investing in the


private markets has been the inherent lack of
liquidity and opportunity to exit for both founders
and investors. Vitally important for the ecosystem
to scale, this need is being addressed by
companies such as The Founders Club and Second
Market, who both provide secondary markets for
private company shares to be traded.

should stimulate greater investment in the private


sector as a whole. The ability to exit a position on
demand increases the flexibility of any investment
and could be seen to lower risk. While the
secondary market for private shares is still very
much emerging, it does not seem a stretch of the
imagination to envision liquid private sector share
markets not fundamentally unlike those that
currently exist for public companies.

The introduction of this type of platform has


allowed companies, such as Facebook, whose
shares traded pre IPO on Secondmarket, to stay
private longer and delay a public listing. After
having some problems, Secondmarket, who last
year handled around $1.5Bn in secondaries,
recently launched a transfer facility that allows
companies and their employees to sell shares in a
more controlled manner, avoiding the need for
traditional brokers.

Wealth Management Platforms


New online wealth management solutions provide
investors with cost effective access to discretionary
asset management. Wealth management has
traditionally been a closed industry, available to
those investors with large amounts of disposable
income, but that is starting to change. Firms such
as Nutmeg and Wealthfront are making wealth
management available to larger amounts of
people via lower cost offerings. For as little as $5k
they will manage investors money and charge
comparatively low rates of around 0.25% of assets,
with no commission fees. Wealthfront, the largest
player has amassed $2.2Bn in assets under
management.

The importance of this new market should not be


understated. Liquidity is always of concern to
investors, and those in Venture Capital are no
different. The increased freedom with which VCs
and company employees can exit equity positions

ADVISORY FEES, 20141

AUM IN PASSIVE MUTUAL FUNDS1

Though crowdfunding currently stands as the descriptor of choice for this segment of the alternative
finance market, over time we believe these platforms should be thought of more as digital investment
platforms to reflect an increasing presence of institutional and accredited investors. This will become
increasingly true as deal sizes move upstream and away from the seed stage. Market infrastructure is
currently being developed so that the sector can support larger transaction sizes. Moreover, as funding
moves online, discovery of investment opportunities will become more centralised. Comparability across
opportunities also becomes easier as the data deficit currently found in the private market is reduced.

49

PARTNER CONTRIBUTION

CROWDFUNDRAISER
Platform: Crowdfunding
Country: United States
Crowdfundraiser, a company that operates across the crowdfunding sphere recently spoke to us about the
landscape ahead for a liquid alternative finance market. It operates a unique and interesting business
model and works with companies who want to offer investors the added protection of a liquid exit.
Although not wholly focused on crowdfunding industry, it recognises the potential for the market when
Title III opens up the sector.
As with other platforms, it sees the core drivers of the industry as the increased access for investors into
private investments and the fact that crowdfunding facilitates capital flows to companies that may
otherwise not be fit for traditional venture capital.
In terms of their liquidity offering, they have found that it is actually start-ups, who are looking to provide
added benefits to investors at a low cost, that are most interested in their services. Investors see the
benefits of being able to recoup some of their investment, but recognise it takes time to exit.
Going forwards and as the crowdfunding market opens up in the US, the expectation is that there will be
more public offerings such as PIPE (private placement in public equity) deals, making way for a more
liquid market where private shares can be traded openly rather than OTC.
For this secondary market to transpire regulation will play an important role. The key here is to keep costs
down, especially when considering most of the issuers are cash bound start-ups. Crowdfundraiser noted
that with initial offering costs at around $40k and the on going costs of reporting around $20k the costs
themselves are not prohibitive and it is more about company owners being able to see the benefit that
liquidity affords their investors.
50

DATA & MARKETPLACES

This importance of data to investing is exhibited by


the current size of Goldman Sachs technology team,
which at 9,199 engineers is significantly more than
the likes of Facebook, Twitter and LinkedIn

NETFLIX
Big data is at the core of everything Netflix
do and with 62Mn subscribers across 50
countries, they have a truly global view
and valuable access to information on
user behaviour.
Many of their key business decisions are
backed by the data they collect, allowing
executives to de-risk the multi milliondollar investment needed to produce a
new TV shows or movie.
In the case of House of Cards, the
popular TV show, user data showed that
Kevin Spacey and Robin Wright were well
received by users, David Finchers films
(which include The Social Network and
Fight Club) were popular, while users
also favoured political dramas.

Data
Traditionally, private company investment has
remained a closely guarded market, accessible
only to a small number of high net worth
individuals with access to proprietary personal
networks. As alternative finance opens up the
marketplace to a wider number of investors,
democratising finance, so too will it enable
investors to make decisions in a more systematic
way.
Decision making in the private market has been
largely focused around intuition or gut instinct,
the result of an inherent lack of data, brought
about by the guarded nature of the industry. But,
as the market starts to transition online and it
becomes easier to collect and analyse large
quantities of data relating to investments and
investor behaviour, it in turn means institutions
and individuals can analyse that data, performing
research and due diligence in a more scientific
manner, paving the way for a systematic approach
to private company investment.

52

Democratising Finance

This transition towards a data driven approach to


decision-making
was seen in the public investment

markets (as well as in a host of other industries) in


the 1980s. Data providers such as Bloomberg
created tools to better track, monitor and analyse
large amounts of information quickly, allowing
users to make more informed and more accurate
decisions. These data providers helped to open up
the market beyond those who invested via index
funds and discretionary money managers to the
wider public.
This importance of data to investing is exhibited by
the current size of Goldman Sachs technology
team, which at 9,199 engineers is significantly
more than the likes of Facebook, Twitter and
LinkedIn.
As it stands the private investment market is
someway behind and although there remains
significant room for innovation in this sector,
recently, there have been a number of new
entrants to the market looking to address this need
for data. By monitoring investor and company
behaviour, these players aim to uncover trends and
provide insights to clients ranging from Banks and
VCs to corporate development teams. Decision
makers need to be aware that, with the market still
in its infancy, the quality of data will vary
significantly and while platforms like Crunchbase
are a good source of top line company data, they
are self written and can therefore be misleading.
CB Insights are one of the key players in this
category and provide high quality data on venture
capital deals, publishing reports and analysis to a
wide range of clients including Cisco, Salesforce,
Castrol and a number of top tier VCs.

Data & Marketplaces

market, it has now expanded to encompass


alternative assets as a whole. Its 24,000 clients,
across 94 countries use the tools they provide to
regularly connect with potential investors,
widening their fundraising market and expanding
the reach of the asset class as a whole.
Marketplaces (Aggregation)
The number of alternative investment platforms
has significantly increased over the last few years.
This poses challenges to investors of how to
navigate such a large number of platforms to find
the right investment opportunity. Coupled with the
increasing geographical spread of these platforms,
and the varying stages of the funding cycle that
they operate at, the alternative finance sector is
becoming an increasingly complex market for
investors.
Similar to what has occurred in other markets, such
as ad-tech, since the rise of the internet, traditional
finance looks poised to move to online
marketplaces that reduce these complexities. On
the equity side of alternative finance specifically,
marketplaces help promote discovery of
opportunities, bringing investment opportunities
across geographies, sectors and company types to
one centralised location.
Debt focused crowdfunding marketplaces are
more focused on efficiency due to higher volumes
and higher traditional borrowing costs, and are
someway in advance of their equity focused
counterparts.

Preqin are another major player in this sector and


although originally focused on the private equity

53

CASE STUDIES
AD-TECH
Around 2001, ad networks began to facilitate the sale of ads between publishers and advertisers. But, the
process lacked transparency, so ad exchanges and real-time bidding started to emerge.
This technology helped the advertisers to drive more sales, while allowing consumers to discover more
products, thus creating an ecosystem that adds value to both sides. The rise of ad-tech platforms has
introduced transparency and efficiency, allowing advertisers to improve the performance of their digital
campaigns and publishers to buy an audience at a fair market price.

ORCHARD PLATFORM
Orchard is a financial technology company that links investors with peer-to-peer platforms, providing
institutions with data-driven loan acquisitions and operational efficiency. Aimed at the institutional
investment market, it facilitates the flow of capital from many leading investment institutions including
hedge funds, pension funds and investment banks to the loan origination platforms.
By utilising technology, it allows originators to scale their business while helping institutions to analyse
large amounts of data and streamline back office procedures, helping the alternative lending market to
move away from its consumer origins and opening up the asset class to institutional investors for the first
time.
Orchard has been backed by veteran bankers, such as Vikram Pandit (former Citigroup chief executive) and
John Mack (former Morgan Stanley chief executive) alongside institutional investors and recently raised a
$12Mn series A round.
Recently a single investor committed $1Bn in just 10 days to a single P2P platform via Orchard, testament
to the increasing involvement that institutions have in this market. Furthermore, Orchard is constantly
increasing the number of loan originators on the platform and the industries in which it operates is
expanding.

54

Democratising Finance

Data & Marketplaces

DEALINDEX INDICES

OUR CROWDFUNDING INDEX MEASURES COMPONENTS OF


GROWTH, A 10-DAY MOVING AVERAGE PROVIDES ADDED CONTEXT
DealIndex - Crowdfunding Index
1,700
1,600
1,500
1,400
1,300
1,200
1,100
1,000
900

9-May 12-May 15-May 18-May 21-May 24-May 27-May 30-May 2-Jun


Crowdfunding Index

5-Jun

8-Jun 11-Jun 14-Jun 17-Jun 20-Jun 23-Jun

10 per. Mov. Avg. (Crowdfunding Index)

AGGREGATE FUNDING VOLUMES


Funding Volumes (Daily)
8

Raised_amount (in USD Mn)

7
6
5
4
3
2
1
0
3/17/2015

3/27/2015

4/6/2015

4/16/2015

4/26/2015

5/6/2015

5/16/2015

5/26/2015

6/15/2015

6/26/2015

55

Democratising Finance

Data & Marketplaces

DEALINDEX INDICES

CUMULATIVE AMOUNTS RAISED: PROVIDING A SENSE OF SCALE OF


THE MARKET
$40

Cumulative Amount Raised on each Funding Stage

Cumulative amount raised (in USD millions)

$35

$30

$25

$20

$15

$10

$5

$0
3/17/2015 3/23/2015 3/29/2015 4/4/2015 4/10/2015 4/16/2015 4/22/2015 4/28/2015 5/4/2015 5/10/2015 5/16/2015 5/22/2015 5/28/2015 6/5/2015 6/20/2015 6/26/2015

Growth

Late

Seed

SEGMENTAL ANALYSIS: MARKET SHARE BY SECTORS


Market Share by Sectors (Amount Raised - Weekly) - International
100%#
90%#
80%#
70%#
60%#
50%#
40%#
30%#
20%#
10%#
0%#
5/3/2015#.#
5/9/2015#

5/10/2015#.#
5/16/2015#

Informa6on#Technology#

5/17/2015#.#
5/23/2015#

Food#and#Drink#

5/24/2015#.#
5/30/2015#

Life#Sciences#

5/31/2015#.#
6/6/2015#

PlaGorms#

6/7/2015#.#
6/13/2015#

Other#

Transport#

6/14/2015#.#
6/20/2015#

Health#Care#

Consumer#

6/21/2015#.#
6/27/2015#

6/28/2015#.#
7/4/2015#

Finance#

56

TOM WALKER

Director, Product & Business Development, DealIndex


Moving towards a hybrid financial system
Alternative finance is set to fundamentally disrupt early stage investing. It will replace an old, inefficient
process with one that leverages modern technology to seamlessly connect companies and investors. An
avenue of capital is being established that will launch hundreds of thousands of ideas that may not
otherwise have seen the light of day.
VCs have typically outsourced the earliest stage to angel investors revealing an opening for a better
system. The historic problem with investing in theprivate markets has been the black hole in terms of data.
How do investors ensure their capital is being deployed effectively whether that be sourcing or evaluating
deals, or monitoring them post investment?
The sheer volume of deals has created its own challenges, meaning the job of finding something of interest
has become harder even while deals themselves have become vastly more accessible. Investors will
therefore require a suite of tools to help them navigate this new world. Technology can help, making it
easier to discover, filter and analyse opportunities on a global basis. The advent of scalable ratings systems
will allow platforms to showcase the best deals.
There has always been risk associated with start-up investment, but this has been magnified as a result of
varying levels of professionalism and experience. Until the regulatory culture keeps pace with the explosion
of new business models, there will be some who are disadvantaged. Increased data collection and due
diligence is key in helping to ensure that industry practices improve as the sector matures.
A decade ago, investor updates were less important because angels had fewer investments and often
followed a set it and forget it program. Today things are much more active, with compressed timelines,
rapid iteration and fierce competition which means that regular updates during the early stages are critical.
The quality and consistency of updates is a clear indicator of a companys progress and likely success.
Our platform provides increased visibility eventually making it possible to track the real-time performance
of investments with high quality financial and non-financial reporting. We aim to address some of the key
risks associated with investing by unifying networks and financial expertise with technology.
57

INFASTRUCTURE

As with any emerging market, infrastructure plays a


vital role in the smooth running of the ecosystem. As
the core players grow in size and their needs become
more complex, so too does the need for a support
system

Democratising Finance

any emerging market, infrastructure plays a


As with
vital role in the smooth running of the ecosystem.
As the core players grow in size and their needs
become more complex, so too does the need for a
support system. This support system must be
made up of providers that offer complimentary
services that allow the core players to focus on
their primary business functions. For the market to
scale effectively it is important that there is a strong
infrastructure already in place.
The majority of alternative finance issuers are still
raising small amounts of capital, meaning both
they and the platforms who facilitate the financing
are often resource bound when it comes to
support providers services. But, as the market
grows and starts to move upstream, there have
been a number of new support providers coming
to market, diversifying the existing infrastructure.
Diligence, Execution and Portfolio and Risk
Management
Support providers have recognised the trend
towards data that is emerging and as such, there
are now a number of players providing data
engines, business intelligence, and sentiment
analysis amongst other things. One such company
is PeerIQ, a financial information services company
focusing on the P2P lending market that recently
raised a $6Mn seed round. It provides institutions
with a credit risk analytics platform, allowing them
to manage risk effectively and thus invest at scale.
As the number of issuers grows, so too does the
need for business valuation tools. Platforms can
now enable companies to quickly and cost
effectively reach a valuation by answering simple

Infrastructure

questions online and compliment the online equity


crowdfunding and M&A platforms. It is often hard
to place valuations on SMEs at the early stages
where there is a lack of revenue but both Bizequity,
which recently raised 6Mn, and Equidam are
tackling this problem using proprietary algorithms.
They also enable businesses to track their progress
over time.
Another platform disrupting the private investment
market is eShares, which was founded in 2012 to
solve the problems relating to the speed with
which private company share certificates are
distributed. It has grown out to compliment the
existing platforms and service the increasing
number of private company investors that
alternative finance is enabling to enter the market.
Along with electronic share certificates, it has
created electronic share registries for private
companies, investors and employees, replacing
the traditional paper registry.
M&A platforms such as Rainmaker and Midaxo
provide tools that help clients, who range from PE
professionals through to corporations, run the
highly complex M&A process. Midaxos cloud
based software simplifies and speeds up the entire
M&A lifecycle from deal sourcing to post deal
integration while Rainmaker provides a similar deal
flow management system, meaning that investors
can not only source deals on online platforms but
they can also manage the entire process online
too.

59

PARTNER CONTRIBUTION

EQUIDAM
Platform: Online Valuation
Country: Netherlands

Founded: 2012

Equidam recently chatted to us about their business valuation tools and how it is helping companies
during the fundraising process. Currently about 3,000 entrepreneurs use the platform, which has been
designed to be user friendly and accessible for founders. At the moment, Equidam has 13 equity
crowdfunding partners in Europe, the US, Canada and Australia that facilitate the investment in companies.
Core to any new businesses need is their ability to attract financing and Equidam is helping to facilitate this
process for SMEs and start-ups by giving them the ability to manage and track their value over time and by
providing a clear roadmap for managing marketability. Providing a way for business owners to measure,
track and grow value is the basis of the Equidam platform.
The valuation tools not only provide a basis with which to engage investors, they also provide legitimacy
for actions in the M&A market, such as restructurings and employee stock plans. Feedback on the platform
from customers has been good, and it has resonated particularly with professionals who are always looking
for more cost effective solutions and can combine their expertise with the Equidam platform to better serve
their clients.

60

Democratising Finance

Back Office
Given that the alternative finance market is
becoming increasingly complex, with players at
differing stages of the value chain, in various asset
classes and across multiple jurisdictions, the role
of back office providers is arguably even more
important than in many other industries. In the last
few years, players have entered the market to
address the growing needs of both the platforms
and the issuers by making is easier for individuals
and institutions to navigate the alternative finance
market.
Crowd Valley is one such company and as an
infrastructure technology provider focuses on
providing platforms and back office services to
alternative finance customers. It operates across
six continents, acting for clients whose business
models range from real assets, to renewable

Infrastructure

energy, to equity crowdfunding. Its platform is


allowing these clients to place less emphasis on
technology by making the operating process
easier, enabling them to focus on their primary
function of sourcing issuers and investors.
Advisory
Grow Advisors is an alternative finance consultant,
offering advice centred on establishing new
crowdfunding and P2P marketplaces. Operating
all the way across the funding spectrum, it helps
clients ranging from large funds to economic
development agencies. For example, a recent LP
client was looking to invest billions of dollars into
companies and projects and Grow Advisors was
able to utilise a cost effective platform model that
allowed them to co-invest alongside others
partners.

DEMAND FOR DIGITAL INVESTMENT PLATFORMS7

61

PARTNER CONTRIBUTION

CROWD VALLEY
Platform: Technology, Infrastructure
Country: US, UK, HK

Founded: 2009

Recently we talked with Crowd Valley about their client base and how it is adopting the digital investment
market. As one would expect the market has changed markedly since it commenced operations in 2009.
While its clients started out as early adopters and financiers who were focused on start-ups, now it
encompasses some of the worlds leading institutions such as investment banks, asset managers and
brokerages with a broader focus across various asset classes.
Crowd Valley services clients all over the world and in varying asset classes, with the majority of its clients
focused on either private company investment, the real estate sector and P2P. In geographic terms its main
markets are the US and Europe, as one would expect, while equity and then lending are the core models
they service. Perhaps most interesting is that 5% of its clients are located in Africa, highlighting the
potential for crowdfunding platforms in the developing world.
Technology has been one of the core enablers of the crowdfunding industry and continues to evolve.
According to Crowd Valley, there is a current trend for traditional financial institutions to try and figure out
ways that technology can allow them to provide more efficient tools to stakeholders, but with much greater
regulatory pressure and more rigid corporate structures they also need to compete with smaller, more
nimble start-ups. These start-ups have grown out to provide a complimentary ecosystem that encompasses
credit scoring, background checks and online payments amongst other things, allowing for a more
transparent and open system.
As competition in the alternative finance sector has increased, so too have platforms need to differentiate
themselves. Clients are now demanding unique user experience, better access to third party APIs and
great analytical ability, all of which have meant that Crowd Valley has had to constantly develop its
technology. It has placed a great focus on building its API, which powers all client platforms, to support the
different investment models from equity and peer-to-peer to niche sectors such as real estate and
collateralised loans.
Crowd Valley is part of the Grow VC Group.
62

PARTNER CONTRIBUTION

KORECONX

Platform: Technology, Infrastructure


Country: Canada

Founded: 2013

The crowdfunding ecosystem requires infrastructure to be fully integrated and seamless, providing the
benefits of compliance and transparency with respect to regulatory requirements. Below are more details
about each of the participants, who need to work together on a global scale.
Securities Commissions are mandated by their respective governments to enforce and administer
securities laws and govern the securities industries in their jurisdictions. The primary goal is to protect
investors and ensure a straight forward, compliant marketplace.
Accredited investors are those investors deemed by the securities commissions to be high net worth
individuals. Typically in any country around the world 3-5% of the population would be considered an
accredited investor. What is surprising to many in the global marketplace is that only a very small
percentage of even accredited investors get the opportunity to see and invest in private placement
financings. John Kaiser a researcher in private markets in North America conducted a research report that
focused on investors in private placements in Canada. Mr. Kaiser points out in his report that in the past
10 years in Canada, the private placements available to the accredited investors only 1% of those
qualified were given an opportunity to invest.
Non-Accredited investors are the rest-of-us, the rest of the countrys population that do not meet the
requirements to be registered as an accredited investor and have been demanding access to early stage
investment opportunities.
Regulated Crowdfunding portals bring issuers and investors together. It sounds simple but in order to
operate a regulated crowdfunding portal in most countries in the world you need to be a registered
broker/dealer. The reason for this is to insure that issuers are being vetted properly to protect the
marketplace and investors. But the entire global marketplace owes the emergence of regulated
crowdfunding to ASSOB the worlds first regulated crowdfunding portal operating 12 years with zero
fraud and has helped companies in Australia raise over $150Mn.
Issuersexchange shares or debt instruments, which are considered securities under current regulations,
for investors' money.
3rd Party Providers are very important in the ecosystem, think of them as the chassis in a car. They are
essential as your first internal crowd to get you started. The participants in the background providing
technology and services to the entire ecosystem to facilitate the process of Pre-During-Post regulated
crowdfunding transaction. These participants can include pre-crowd service providers, video production
companies, investor networks, social media and marketing professionals, and many others.
The nature of these markets and the way business is done can change rapidly and governments are
responsible for laying a proper foundation on which businesses and people can grow and conduct their
business. The advancements in technology and social media allow us to bring a message to billions of
people across the globe in seconds. The way we communicate, collaborate, and invest has changed
forever. For anyone, anywhere in the world, involved in regulated crowdfunding, these are very
exciting times.

63

PARTNER CONTRIBUTION

GROW ADVISORS

Platform: Consulting
Country: HK, UK, US

Founded: 2009

FinTech has broken into the last bastion of financial markets, Wall Street. From New York to London,
Frankfurt to Hong Kong, industry insiders are peering from behind monitors to witness the emergence of
a revolution in finance that has been several years in the making. The financial crisis of 2008 and the
emergence of FinTech are beginning to shake the landscape. Simply put, FinTech is technology working
hand-in-hand with financial services, creating tools and services to meet todays demands. These
demands are being driven by millennials. Their behaviour is linked to the rise of FinTech, and the
emergence of new business models and companies. The term FinTech was originally coined for the back
and middle office areas to assist customers of financial organisations: a technology for financial
institutions and their services. That definition has evolved greatly, and today FinTech disruption in financial
services is being seen across all verticals including Payments, Lending, Insurance, Asset Management and
Equity Finance. Today, emerging companies are carving up traditional sectors, and delivering superior
services based on technology and a data analytics.
Alternative Lending
Lending has been a big beneficiary of the rise of sophisticated social networks - those which connect
people for business or investment ends. Lending Club, Lending Tree and Prosper, are among a more
noticeable group of emerging platforms. Their efficient business models raise the technology bar and
soon are expected to chip away at servicing the needs of SMEs and the traditional corporate world. Some
banks are forming partnerships with alternative lenders as a way to participate and learn. Others are
investing in alternative marketplace technology to level a tilted playing field.
Capital Raises through Crowdfunding and Crowd-Investing
One disruptive category with the potential to alter the future of Investment & Commercial Banking and
Wall Street is the raising of capital through crowdfunding. Some in these industry today still write-off
crowdfunding as niche; the domain of 3D printers, smart-watches and struggling movie-makers. That very
complacency has the potential to significantly increase the stakes and the disruptive potential. Capital
raising platforms have already begun to fill the post global crisis funding gap to serve the start-up and
small company market. In the coming years, traditional intermediaries and investment banks stand to see
their market shares erode as experienced platforms begin raising capital for multi-million dollar projects
and global institutions. Capital raising platforms have already iterated several times in the last 3 to 4 years,
and soon will take centre stage with larger offerings.
Executives in FinTech businesses feel they are on the right track, and moving fast. Investment in this space
tends to support this. According to Accenture, investment in FinTech more than tripled between 2008 and
2013, and grew by more than 200 percent globally in 2014. Growth in overall venture-capital investments
grew by 63 percent in comparison. This trend is not going unnoticed and FinTech is expected to attract
more players, with greater innovation and disruptive ideas. The future of innovation and technology
continues to develop - and at a faster pace than in the past. There are many possibilities for emerging
countries and regions to participate. Technology is enabling change in financial services. Thats welcome
news for everyone, not only for those leading the innovation, but also for governments, investors and
customers alike.
Grow Advisors is part of the Grow VC Group.

64

INVESTORS

Rather than trying to supplant banking and venture


capital, a collaborative model is emerging where
digital platforms work side by side with traditional
investors

Democratising Finance

Investors

The slashing of interest rates globally in the wake


of the 2008 financial crisis pushed retail investors
to look to non-traditional investments to boost
returns. This major development boosted the
popularity of the alternative finance market as an
asset class. Since then, the increased access
afforded by the online investment model has
meant that the industry has secured its position
alongside more traditional asset classes, drawing
the interest of institutional investors.
As it stands, the investor side of the alternative
finance market, incorporating both debt and
equity, is made up of both retail and institutional
investors. As the alternative finance market moves
upstream, drawing larger more established SME
issuers, institutions are becoming more involved.
These institutions are investing in the space both
through platforms and in the platforms
themselves.
Retail
Retail investment into the P2P market has been
primarily driven by the low interest rates available
globally on bank deposits. When factoring in
inflation rates, the picture for savers becomes
even worse. In the UK for example, with interest
rates at 0.5% after the financial crisis and inflation
at around 2% up until recently, in real terms,
capital deposited in banks was decreasing in
value. Compared to the rates on offer from various
different P2P platforms during the same period, it
is easy to see why alternative lending has become
so popular for consumers.

Other key drivers for P2P lending include: the


diversification benefits brought about by
incorporating new asset classes into a portfolio;
consumers general dislike of banks as a result of
their perceived role in the global recession; and
the ability for investors to choose exactly where
their capital goes.
The story with retail equity investment is similar - it
is the outsized returns from private company
investment that draws investors. But aside from
this, the key driver for equity crowdfundings rapid
growth is the increased access to a previously
severely restricted asset class. For relatively small
qualifying amounts, investors can now gain access
to a market that has been traditionally out of the
reach of most ordinary people. The low qualifying
amounts also mean investors can spread their
investment over a number of companies and
lower overall portfolio risk.
Prior to the introduction of equity crowdfunding
platforms, it was notoriously hard for individuals to
invest in private companies. Legislation made it
illegal for companies to advertise that they were
raising funds, meaning they could not post it on a
website or on social networks, making it hard for
investors to identify which companies were in
need of capital. Other ways were to invest were
via an angel network or venture capital firm, but
both are prohibitively expensive for the majority
of people.

INVESTOR PROFILING IN THE US

66

TIMOTHY YANG

Director, Business Development, DealIndex


The Rise of Private Investments
The private company investment sphere has long been the traditional domain of private equity and venture
capital firms. However, in recent years, many institutional and retail investors have increasingly taken an
interest towards investing in this exciting and promising sector. Several hedge funds are now running a
hybrid model where they are not only investing in the public markets, but also late-stage startups. While
this is happening, retail brokers are looking for different ways to diversify their portfolio by investing a
portion of their portfolio in small private companies. What is driving this recent phenomenon? Listed below
are the key factors that are helping to shape the new private investment market:
1. Start-ups are Going Public Much Later With all the money flowing into the private sector, companies
are going public at a much later stage than before. Take, for example, Amazon. When Amazon IPOd in
1997, its market cap was $438Mn. Today, its market cap is $202Bn, which is 460 times higher than the IPO
price. Compare this to Alibaba. When Alibaba IPOd last year, its market cap was $155Bn. In order for
investors to make the same kind of return in Alibaba as they did in Amazon, Alibaba would have to increase
its market cap to $71Tn by 2032 - which is near impossible. Due to this trend, many investors are missing
out on the benefitof investing in early stage companies, and are therefore having to invest in the private
market in orderreap the higher (potential) returns.
2. Globalisation Globalisation is helping private investments reach a broader audience. Today, companies
do not need to be restrained to their local markets in order to seek funding. Thanks to the Internet,
companies can easily market themselves, raise funding, and make financial transactions online. At the same
time, investors are looking abroad in order to diversify their investment portfolio. The ease of making
investments and raising funds globallyis makingprivate investing ever more popular.
3. Information Transparency Startups are not as 'mysterious' as they once were. Information on start-ups
is now more transparent and can readily be found and obtained. There are databases, and analysis on
different types of start-ups, venture capital firms, and angel investors etc. The abundance of all this wealth
of information has not only instilled investors with greater confidence towards investing in start-ups, but
has also made it much easier for them to track their investments.
4. The Rise of the Syndication Model The rise of the syndication model has largely broadened the
investor base. Using the syndication model, one investor can lead the deal, and other investors (who
probably wouldnt have been able to participate in the past) can now just follow the lead investor and back
the deal.
5. Rich Valuations Lastly, the valuations of start-ups have reached their richest levels in the past decade.
There are currently 91 companies valued at $1Bn or more by the VC firms, compared with just 56 a year
ago. And all the hype around unicorns (e.g. the next Uber) is pushing the valuations even higher. The
higher these valuationsbecome, the more it seems investors want to invest in them.
The above five factors are largely driving the changes witnessed in the private investment market today.
Just like the public market though, the sphere of private investments is not without its associated ups and
downs. The push towards more information transparency, globalisation and evolving private company
structures means that the fundamentals of the private market are constantly changing. What can be certain
though is that private investment is here to stay and will increasingly be open to more investors globally.
No longer is private investment just within the exclusive domain of the traditional private equity and
venture capital firms.
67

Democratising Finance

Investors

Institutional Investment
Thus far the alternative finance sector has seen a
divisive split between the characteristics and
development of equity versus debt-focused
platforms. Debt platforms have outpaced equity
offerings in the pace at which they have been
adopted by institutional investors. In fact, many
P2P lenders, such as Lending Club, Funding
Circle, and Prosper, already have direct funding
lines to banks. Arguably one of the reasons that
the P2P lending market is comparatively more
advanced than the equity crowdfunding market is
that the offering is more advanced for institutional
investors. Tools are more complete and allow
institutions to more easily analyse investments,
assess risk and execute deals. Platforms such as
Orchard and PeerIQ, make the investment process
simpler and more transparent. The short-term
returns available through platform-based lending
should also not be overlooked as a factor driving
this trend. The ready adoption by institutional
investors helps explain why debt platforms have
received more media attention and outsized
valuations, such as Lending Clubs $6.42Bn
valuation as of June 2015. However, equity
platforms now look set to catch up with debt
platforms as they increasingly attract institutional
investment.

One of the major trends in the financial markets


has been ever-later IPOs by large, successful,
young businesses. This has meant that investors,
especially on the institutional side, such as those
from hedge funds and mutual funds, are having to
invest in companies when they are still private in
order to see the outsized returns they used to
earn from investing at the IPO stage. A number of
developments are making such investing more
viable and fluid.

When it comes to equity crowdfunding, a more


complete offering that better serves the need of
institutions is starting to emerge. As more data
providers and marketplaces come online, allowing
institutions to better source and evaluate deals,
institutions are becoming more involved. Newer
hybrid, co-investment models are evidence of
institutional participation alongside the crowd.

All of this informs our view that equity


crowdfunding, like debt-based P2P lending, is
going to attract ever more institutional investment
moving forward, boosting deal volumes and
professionalising the market. Some institutional
investors may even go a step further, investing in
the space by buying the platforms themselves.

Firstly, aside from the increased access that equity


crowdfunding platforms afford investors, they are
also able to massively reduce the time it takes for
investors to make decisions. Platforms do a lot of
the legwork by condensing all the investment
articles into one place and save the investor the
time it takes to reach out to a company
themselves. They can also offer guidance in the
form of pre-vetted deals and by being able to
view the other investors in a deal.
Additionally, the growth of platforms like
SecondMarket and Founders Club, makes it
easier than ever for investors to commit capital
comfortably, allowing investors to enter and exit
positions in a similar way to what they have grown
accustomed to in public markets.

68

CASE STUDIES

P2P GLOBAL INVESTMENT

FABER VENTURES

Marshall Wace, the hedge fund firm that has


$17Bn under management recently floated a
200Mn closed-end fund in conjunction with
Eaglewood Capital Management, a P2P
investment specialist.

Faber Ventures became the first major venture


capital firm to source an investment through a
crowdfunding platform when it invested 180k
in Maily, a start-up that provides safe, fun and
simple email for young children.

The fund, targeting a yield of between 6-8%


annually, then further raised 250Mn in January
this year. The subscription was heavily over
subscribed and extended from the original target
of 200Mn. This stands to highlight institutions
increasing involvement in the P2P lending market
and appetite for investors.

After seeing the campaign on Seedrs initially,


Faber approached the start-up to increase its
funding target to allow Faber to invest and they
duly did.

500 STARTUPS

INDEX VENTURES

500 start-ups, the start-up investor/accelerator


group, recently announced the launch of a new
investment fund - Fund III, targeting seed rounds
and the occasional Series A and B.

Index Ventures recently led the 5.2Mn funding


round of crowdfunding platform Property
Partner, which is aiming to disrupt the residential
property market, letting people invest for as little
of 50.

What made this particular fundraise interesting,


was that 500 Startups raised part of the $100 Mn
target online via SeedInvest and in doing so
became the first investment group to take
advantage of new regulations and raise funds
publicly via a crowdfunding campaign.
Furthermore, SeedInvest will also partner with 500
Startups to manage the investment process of the
new fund.

Faber stated that it was able to invest because of


the legal structure used by Seedrs, whereby
Seedrs act as the sole shareholder, saving Faber
from negotiating with every other investor.

Index Ventures other investments include


Funding Circle, TransferWise and Wealthfront,
while other notable investors in the round
included Octopus Ventures, SeedCamp and Ed
Wray, a co-founder of Betfair.
A popular feature of the platform is a resale
market where investors can buy and sell shares
in fully funded properties.
69

JOUKO AHVENAINEN
Co-Founder & Advisor, DealIndex and Co-Founder & Chairman,
Grow VC Group
Institutions leveraging digital investment and
lending on a global scale
How has the way institutions utilise digital investing and lending evolved since the financial crisis?
The financial crisis probably accelerated the process, but it had started earlier. Digital advancements have
influenced many industries and value chains, but the finance sector is more conservative and more
regulated that many other industries, so the change has taken more time. Online and mobile have
primarily been distribution channels and therefore have not really impacted on the value chain and
structures of the finance sector. However, during the last 5 years we have also started to see changes in
those areas. Typically, the existing actors (e.g. banks, funds, finance institutions) were not the first ones to
adopt these new models, it was start-ups and new players that offered models like P2P lending and
crowdfunding. And with these now playing more of a significant role, the traditional actors must adapt
their own models.
In what regions of the globe has the growth of digital investing and lending been most pronounced?
What has allowed for the acceleration of usage in certain regions from a regulatory, financial and cultural
standpoint?
There has been a lot of regulatory development in the the last 5 years, but there still remain numerous
differences between countries. The US market is always important in new innovations and its capital
market is the most important in the world. In P2P lending the US had the first significant companies. The
JOBS Act also meant regulatory changes e.g. by allowing marketing and advertising of private investment
opportunities and offering a lighter IPO-style model. We continue to wait for Title III that would allow
investments in private companies for non-accredited investors. This has slowed progress for crowdfunding
models in the US. The UK is also an important finance hub and is now probably the leader in
crowdfunding and P2P lending - with the FCA having given quite clear regulatory guidelines. China is a
very active P2P lending market, but the regulatory situation is much more unclear. There are crowdfunding
and P2P lending services in many other countries, but a lot of differences in the regulation and some grey
areas. We expect quite a lot of growth in the emerging markets, e.g. in Asia and Africa, though the
regulatory environment lags the leading markets.

70

Of the institutions that have been early adopters of digital investing and lending, what are some of the
characteristics they share? Are there any distinctions by industry, size or geography?
As is typical in many industries, smaller players and newcomers are the first ones to adopt new models,
with larger players follow when there is sufficient evidence. We are starting to see that now. Of course
there are some companies that are content with their old models and not looking for growth, but those
that really want to find future growth strategies and better ways to operate are willing to adopt new
models. We have differences in the regulation and speed of development geographically, but there are
innovative and active companies and people around the world in all kinds of organisations and industries.
What is your outlook for institutional use of digital investing and lending? How do you see it coexisting
with traditional finance?
We see that these models will impact the whole finance sector. Crowdfunding and P2P lending are not
isolated islands, they must co-exist with other models and do more to accelerate this process - which we
are already starting to see e.g. institutional investors participation in P2P lending and use of
crowdfunding and similar online investing platforms to find co-investors. The finance sector needs these
new models, and the efficiency and transparency that they bring. They can help evolve many of the
existing investing and lending models, removing non-value-adding middlemen, and positively impacting
on internal processes. There will likely be many more new products, finance models and services based on
digital platforms to come.

71

ADAM MARTIN
Co-Founder & CTO, DealIndex
My personal experiences of crowdfunding
I first started investing in crowdfunding campaigns, albeit cautiously, in around 2012 with the launch of
Seedrs in the UK, although before then I had become aware of the industry via AngelList in the US. I was
initially drawn not only for financial reasons but also primarily out of an interest and desire to learn more
about the whole process for my own business interests.
As I see it, alternative investment platforms are not only opening up the investment market for investors but
they are also making the fundraising process more transparent for entrepreneurs, educating and inspiring
many would be founders who are able to not only see what kind of ideas are out there, but also learn about
how companies are being run, what team structures look like and what kind of returns are expected.
Most of the companies I invest in tend to be at the seed stage as expected returns can be that much greater.
From my experience, most companies listed on Seedrs tend to have validated business models and with
issuers operating in a wide range of sectors, I can gain access to markets, such as the hospitality industry,
that ordinarily I wouldnt be able to.
When it comes to making an investment I tend to distribute the most capital into those industries that I
understand well. I focus primarily on the team, the valuation, and who the other investors are. I also generally
speak with the company before making an investment and use their product in the way a customer would.
The actual process of investing through the platforms has been simple and is much easier than it would be
to go directly to the companies myself, with all of the paperwork being taken care of.
One challenge I have found with the crowdfunding industry is that the process of finding the right
investment is becoming particularly time intensive. There are an ever-increasing number of platforms
globally, each of which draw a certain type of issuer.
While this impressive growth further stands to highlight the huge potential of the crowdfunding industry, as
investors become more sophisticated there is a need for tools that allow them to find specific deals that fit
their portfolios, on a global scale and in a short amount of time.

72

Democratising Finance

Investors

DEALINDEX INVESTOR INSIGHTS

INVESTMENT PROGRESS AND INVESTOR DISTRIBUTION

FUNDING VOLUMES

73

CONCLUSION

"Marketplace lenders have led the way with their


high degree of institutional involvement, but given
the direction of companies staying private longer,
even mainstream investors like pension and mutual
funds seem likely to become heavily involved in
crowdfunding

Democratising Finance

Conclusion

CONCLUDING REMARKS FROM OUR EDITOR

Duncan MacDonald-Korth
Director, Research and Sales
To conclude this report, I wanted to point out some key trends which investors and participants in the
alternative finance market should look out for in the medium term.
Interest Rates
How will global interest rate rises impact both the equity crowdfunding and marketplace lending spaces?
Both sub-sectors of alternative finance have surged during the Great Recession, an era of historically low
interest rates. This has arguably boosted the sectors appeal, as investors tolerated increased risk for the
chance of outsized returns. Will investors remain as interested if they can earn higher returns in more
conventional asset classes?
Valuations
Valuations are another important area to keep an eye on. Because the equity crowdfunding space is
nascent, there is little data to help benchmark valuations earned through digital fundraising versus
conventional methods. As the sector matures, such data will become more readily available, allowing both
investors and founders to weigh their options when raising money or investing.
Regulations
So far, the equity crowdfunding and marketplace lending spaces have enjoyed comparatively little
regulation. This may be set to change, as anecdotal evidence suggests regulatory authorities, including the
US SEC, are beginning to look much more closely at the sectors. While such regulations could hurt
operating margins for some platform providers, they may ultimately have the effect of boosting investor
confidence and thus raising the liquidity of alternative finance markets.
Institutions
Given evidence of growing institutional interest in the alternative finance sector, it seems likely that large
financial firms will become ever more involved in the sector. Marketplace lenders have led the way with their
high degree of institutional involvement (e.g. an 80% share for institutions at Lending Club), but given the
direction of companies staying private longer, even mainstream investors like pension and mutual funds
seem likely to become heavily involved in crowdfunding. Anecdotal evidence shows they are already
committing capital to private companies, and we expect involvement to increase.
The alternative finance sector has now reached a tipping point where it will launch itself into the
mainstream. There are undoubtedly challenges ahead, but with its explosive growth rate and high added
value for all involved, the sector is set to become a mainstay of global finance.

75


DealIndex is an intelligent data and deal aggregator of private companies raising capital in real-time
across leading crowdfunding platforms globally. Our offerings include:
Dashboard
Global Crowdfunding Aggregator: the DealIndex dashboard provides single sign-on access to thousands
of private companies raising capital. Our global crowdfunding aggregator allows investors to navigate
and track deals in real-time, manage their portfolio of private company investments, make informed
investment decisions backed by extensive analysis, data and research.
Research & Insights
Original content and research on the Alternative Finance Ecosystem including market trends and updates,
fundamentals impacting the sector, and valuable insights.
Indices
Tracking the global crowdfunding / alternative finance market through proprietary indices.
Sign-up for our dashboard here: https://dashboard.dealindex.co/
DealIndex is headquartered in London with offices in New York and Hong Kong. DealIndex is part of the
Grow VC Group, a worldwide pioneer and leader in the crowd investing, peer to peer and online
investment market. Together, the DealIndex team brings a wealth of finance, investment, technology, and
startup experience.

76

CONTACT

DealIndex Research and Sales Team


Michael Cameron
Research and Investment Associate
michael@dealindex.co

Edward Flach
Research and Investment Associate
edward@dealindex.co

Duncan MacDonald-Korth
Director, Research and Sales
duncan@dealindex.co

Neha Manaktala
CEO & Founder
neha@dealindex.co

Tom Walker
Director, Product and Business Development
tom@dealindex.co

Timothy Yang
Director, Business Development
timothy@dealindex.co

Media and Press Contacts


Michelle Tang
Director, Marketing and Media Relations
michelle@dealindex.co
+852 6767 0663

General Contacts
General Enquiries: info@dealindex.co
Partnership Enquiries: partner@dealindex.co
Sales and Dashboard Users: sales@dealindex.co
Research Enquiries: research@dealindex.co
www.dealindex.co

77

BIBLIOGRAPHY

Sources for Figures and Charts


1. Perry, H., Schwartz, D. & Sun, T., 2015. The Future of Finance Part 3: The Socialization of Finance, New
York, NY: Goldman Sachs
2. Estimates from Crowdfunder
3. Estimates from Fundable
4. Massolution, 2015. Crowdfunding Industry Report, s.l.: Massolution
5. Baeck, P., Collins, L. & Zhang, B., 2014. Understanding Alternative Finance: The UK Alternative Finance
Report 2014, Cambridge, UK: University of Cambridge and Nesta
6. Forbes, Trends Show Crowdfunding To Surpass VC In 2016, 9 June 02015 [Online]
7. Crowd Valley, 2014. Digital Investing Report: Facts and Figures Q4 014, London: Crowd Valley Inc.
8. CB Insights, 2015. Crowdfunding Industry. [Online]
9. Firoozmand, S., Haxel, P., Jung, E. & Suominen, K., 2015. State of SME Finance in the United States in
2015, s.l.: TradeUp Capital Fund and Nextrade Group LLC
10. Prodigy Network, 2015. The Future of the Crowd Economy: Forecast Looks Bright. [Online]
Available at: http://prodigynetworkblog.com/crowdfunding/the-future-of-the-crowd-economy-forecastlooks-bright/ [Accessed 4 May 2015]
11. Wardrop, R., Zhang, B., Rau, R. & Gray, M., February 2015. Moving Mainstream: The European Alternative
Finance Benchmarking Report , London: University of Cambridge.
12. Financial News, Five Things You Need to Know About Marketplace Lending, 22 May 2015 [Online]
13. Company Information from OurCrowd
14. Treasury Direct [Online] and Company Sources
References
15. Perry, H., Schwartz, D. & Sun, T., 2015. The Future of Finance Part 3: The Socialization of Finance, New
York, NY: Goldman Sachs
16. Crowdfunding an infant industry growing fast (IOSCO)
17. BBC News: http://www.bbc.co.uk/news/magazine-21932675
18. Alternative finance in Australia (Equitise)
19. Business Insider: http://www.businessinsider.com/oculus-rift-kickstarter-2014-3?IR=T
20. Bloomberg: http://www.bloomberg.com/news/articles/2015-04-23/lending-club-expands-intobusiness-loans-with-google-alibaba-help
21. CityAM: http://www.cityam.com/209369/parking-app-now-tapping-crowdfunders-growth-capital
22. How does crowdfunding impact job creation, company revenue and professional investor interest,
Crowdfund Capital Advisors
23. Seedrs: http://learn.seedrs.com/neardesk-raises-one-of-the-largest-ever-equity-crowdfunding-rounds/
24. Thisismoney: http://www.thisismoney.co.uk/money/markets/article-2780631/Winemaker-Chapel-Downraises-4m-private-investors-crowdfunding-campaign.html
25. Seedts: http://blog.seedrs.com/2014/07/13/nicola-horlicks-glentham-capital-returns-to-seedrs/
26. Kickstarter: https://www.kickstarter.com/help/stats?ref=footer
27. Lending Club: https://www.lendingclub.com/
28. Funding Circle: https://www.fundingcircle.com/
29. Crowdfund Insider: http://www.crowdfundinsider.com/2015/04/67102-orchard-a-single-investor-justcommitted-1-billion-to-a-marketplace-lending-platform/
30. Crowdfund Insider: http://www.crowdfundinsider.com/2015/04/67102-orchard-a-single-investor-justcommitted-1-billion-to-a-marketplace-lending-platform/

78

BIBLIOGRAPHY

29. Crowdfund Insider: http://www.crowdfundinsider.com/2015/04/67102-orchard-a-single-investor-justcommitted-1-billion-to-a-marketplace-lending-platform/


30. UKBAA: http://www.ukbusinessangelsassociation.org.uk/news/milestone-crowdfunding-major-venturecapital-firm-invests-alongside-crowds-through-seedrs
31. Index Ventures: https://indexventures.com/news-room/news/property-partner-raises-%C2%A352m-tobuild-global-stock-exchange-for-residential-property
32. Venture Beat: http://venturebeat.com/2014/06/26/500-startups-public-fundraising-100m

Pictures Credit
Mark Sebastian, Thomas Leuthard, Eflon, Lars Plougmann, Instant Vantage, Ondrej Supitar

79

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