The State of UK Equity Crowdfunding in 2022
Equity crowdfunding is becoming an increasingly common method of raising capital for small businesses in the UK. In 2011, crowdfunding platforms were responsible for just eight announced equity fundraisings in the UK. In comparison, crowdfunders facilitated an impressive 573 rounds in 2021, which also made them the third most active investor type in the UK equity market, behind private equity and venture capital firms (1,359) and business angels (602).
In this report, we explore how equity crowdfunding works, and the current state of the UK equity crowdfunding market, including the country’s leading platforms. For more insights, download our ranking of the UK’s top 10 crowdfunded companies below.
Download the full report, including profiles of the UK’s top 10 crowdfunded companies.
What is equity crowdfunding?
Equity crowdfunding is a popular method of fundraising for early-stage and growth businesses, in which the public (aka the crowd) can invest in ambitious startups and scaleups. As with other types of equity investment, in exchange for providing growth capital, investors receive an equity stake in the company. In this way, it differs from donation or reward-based crowdfunding, such as on Kickstarter and GoFundMe, where entrepreneurs seek non-equity based backing for their business plans, and from loan-based crowdfunding (peer-to-peer lenders).
Who can invest via equity crowdfunding?
Prior to equity crowdfunding, only institutional investors and angel investors (with a high net worth and industry connections) could participate in equity rounds and profit from the UK’s fastest-growing startups. The introduction of equity crowdfunding platforms in the early 2000s changed this, providing retail investors with the opportunity to back promising private companies.
Practically anyone can take part in equity crowdfunding now thanks to online platforms like Crowdcube and Seedrs (the most prominent equity crowdfunding platforms in the United Kingdom). Individual crowdfunding platforms will determine who has access to investment opportunities, with some allowing you to invest immediately after completing a simple registration, while others require investors to pass stringent due diligence checks.
Through these equity crowdfunding platforms, a high number of investors (often in the thousands) can participate in a single funding round. Each individual receives a small equity stake in the company, in the hopes that it will eventually float on a stock market or be acquired for a large sum.
Crowdfunding regulations and tax incentives
Equity crowdfunding is well regulated in the UK, with the Financial Conduct Authority (FCA) enforcing Prospectus Rules on any deal above €5m. Equity crowdfunding platforms also have their own regulations to protect both investors and entrepreneurs, but this differs between each platform.
Crowdcube and Seedrs have created polls to see if all parties are aware of all the risks associated with crowdfunding. Whereas, SyndicateRoom required you to self-certify as an accredited investor or a high-net-worth individual. Previously an online crowdfunding platform that allowed amateur investors to co-invest alongside angels, SyndicateRoom stopped its crowdfunding offering in October 2019. It now raises capital for EIS-qualifying companies via its Access EIS fund.
EIS (The Enterprise Investment Scheme) is one of several UK Government schemes offering tax incentives to individual investors. Both EIS and SEIS (The Seed Enterprise Investment Scheme) were established to encourage early-stage investment in the UK. Equity crowdfunding offers individuals the opportunity to invest via these tax relief schemes, whilst also supporting the UK’s high-growth ecosystem.
The UK’s top equity crowdfunding platforms
Equity crowdfunding platforms have effectively democratised support for high-growth businesses, by allowing novice and hobbyist investors to purchase equity stakes in promising companies, for as little as £10. Let’s take a closer look at the biggest players in the UK’s equity crowdfunding space.
Seedrs and Crowdcube are the UK’s leading crowdfunding platforms, as well as the two most active investors in the UK equity market in 2021. During the year, Crowdcube facilitated 234 announced funding rounds, amounting to £198m worth of investment into UK companies, while Seedrs facilitated 272 deals, worth £126m in total. These figures include pre-emption rounds—rounds that offer existing investors the chance to buy new shares from a business, before new investors (which allows existing backers to avoid dilution).
The two crowdfunding platforms announced plans to merge back in October 2020, in an attempt to form one of the biggest private equity marketplaces in the world. Following an investigation by the Competition and Markets Authority (CMA), however, Crowdcube and Seedrs jointly agreed to terminate the proposed acquisition a few months later.
Headquartered in Exeter and launched in 2011, Crowdcube operates a sector-agnostic crowdfunding platform. While it invests predominantly in the UK, over 25% of pitches currently on the platform are from businesses based elsewhere in Europe. It does not exclusively invest in EIS or SEIS-qualifying companies.
Funding on Crowdcube is available as equity investment or convertible loans. It’s currently free for entrepreneurs to register and add a business pitch to the platform but, once they’ve successfully raised their target amount, Crowdcube will deduct a fee of 7%. There is a 1.65% investment fee, followed by a success fee of 5% if an investor makes a profit.
Seedrs facilitated its first equity fundraisings with the crowd in 2012. Again, this equity crowdfunding platform is sector-agnostic and does not invest exclusively in companies that are eligible for EIS or SEIS. Individuals can use Seedrs to invest in European companies, through single equity rounds, convertible loans or fund campaigns (which allow investments into multiple businesses through a single investment).
Investors pay a 1% investment fee and a 7.5% fee on any profit made from investments through the platform. Company raise fees are set at 6% on all funds raised, alongside a £2,500 campaign competition fee.
Risks and benefits of equity crowdfunding
Any kind of investment into early-stage businesses is high-risk, and this is no different with equity crowdfunding. Some of the downsides and risks to equity crowdfunding include:
- No guarantee of success
- It can take several years before you see a return on your investment
- Illiquidity of equity crowdfunding investments
- There are typically platform fees for both investors and businesses
- Risk of equity dilution as companies raise further equity investment at a later stage
- Possibility of fraud, especially if platforms do not perform stringent due diligence checks
But there are also a number of potential benefits to equity crowdfunding, for both investors and entrepreneurs. These include but are not limited to:
- Improved access to growth finance for small businesses, from a more diverse group of investors
- Potential for high ROI and early investment into future unicorn companies
- Many equity crowdfunding platforms offer support and advice throughout the investment process
- Opportunity for investors to benefit from tax relief schemes like the EIS or SEIS
How has equity crowdfunding changed in the UK over time?
In keeping with wider market trends, 2021 was by far the best year on record for crowdfunding deal numbers—with 573 rounds announced in total.
Crowdfunding has become a central part of the UK’s high-growth ecosystem, with investments involving the crowd accounting for around 21% of deals in recent years. Having survived the shock of the COVID-19 pandemic relatively unscathed, it will be interesting to see if this proportion changes amidst the current macroeconomic climate. With the cost of living climbing in the UK, we could expect crowdfunding platforms (which are reliant on individual investors) to be worse affected than institutional fund types.
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How does equity crowdfunding compare to venture capital?
Crowdfunding investment takes a very different approach to that of venture capitalists, with smaller amounts of capital being deployed by a much larger pool of investors. As a result, the kinds of companies that receive crowdfunding also differ from those backed by VCs. Here, we analyse every UK equity deal that saw participation from crowdfunding platforms and venture funds between 2011 and 2021, including both announced and unannounced rounds.
When we talk about “crowdfunded companies”, we mean any UK company that has successfully raised finance through an equity crowdfunding platform since 2011. The term “venture-backed businesses”, on the other hand, refers to every UK company that has raised equity finance from either a venture capital or private equity firm since 2011, where we can confirm the identity of investing funds.
In total, 2,107 UK companies secured equity crowdfunding between 2011 and 2021, across 3,300 funding rounds. Meanwhile, 4,601 companies secured venture funding in this same time period, across 7,309 rounds, while 435 companies secured both forms of fundraising (and are thus double counted in this analysis).
Stages of evolution
In 2021, the median round size for crowdfunding deals was £487k, considerably below the £2.10m median seen for equity deals involving PE and VC firms. This is unsurprising, given the prevalence of crowdfunding at the earliest stages of a company’s evolution, when they’re typically raising smaller rounds.
The majority of crowdfunded companies (53%) are operating at the seed stage at the time of fundraising, compared to only a third of venture-backed companies (33%). Whilst our data indicates a similar proportion of businesses at the venture stage for both crowdfunding and venture capital, just 8% of crowdfunded companies are later-stage (either growth or established), versus 25% of venture-backed companies.
Having said that, crowdfunding is becoming a more popular and trusted form of equity investment in the UK, and an increasing proportion of later-stage businesses are now turning to this collective form of finance. In 2013, an overwhelming 82% of crowdfunding deals went to seed-stage startups but, in 2021, this figure had dropped to just 39%.
Crowdfunded companies are much more likely to cater to consumers (71%) than other businesses (43%) or the public sector (7%). In contrast, only 41% of venture-backed companies target consumers, while 68% target businesses and 14% target the public sector.
Successful crowdfunding campaigns often draw on strong brand recognition and customer loyalty, with individuals often backing products and services that they’ve tried before. This likely explains why B2C companies more commonly seek and raise funds from the crowd than their B2B counterparts.
While technology, business and professional services, and industrials are the most popular industries for both crowdfunding and venture capital investment, crowdfunded companies are more likely to operate in consumer-focused sectors. For instance, 14% currently operate in the food and drinks space, compared to just 3% of venture-backed businesses. On the other hand, 22% of venture-backed companies are in the B2B-dominated software-as-a-service (SaaS) sector, versus 11% for crowdfunded companies.
The regional distribution of companies that receive investment from crowdfunders versus venture capital and private equity funds is relatively similar. Both fund types invest predominantly into companies headquartered in London.
Between 2011 and 2021, the crowd backed 1,125 London-based businesses, representing 54% of all crowdfunded companies in the UK. In the same period, 2,209 London-based businesses secured funding from PE and VC firms, accounting for 48% of all venture-backed companies in the UK. The next most popular destination for both types of equity investment is the South East—12% of crowdfunded companies and 11% of venture-backed companies are based in the region.
Nonetheless, there are some distinctions in the distribution of crowdfunding and venture capital investment across the country. Crowdfunding is especially common in the South West, for instance, perhaps related to Crowdcube’s presence in Exeter. Whereas, a relatively small proportion of equity crowdfunding is deployed to the North of England (made up of the North East, the North West and Yorkshire & The Humber). In total, just 8% of crowdfunded companies are based in the North, compared to 13% of venture-backed companies.
The difference between crowdfunding and venture capital is also reflected in the relatively slow progression of companies following investment from the crowd. Just 5% of crowdfunding rounds between 2011 and 2021 went to companies that have since exited the private market, either through an IPO or acquisition, compared to 17% of venture rounds.
Crowdfunded companies are also less likely to have progressed to later stages of evolution (18% of crowdfunding rounds versus 22% of venture rounds) and more likely to have gone under (20% versus 12%). Meanwhile, the majority of crowdfunding deals (57%) went to businesses that have since stagnated, compared to 49% of rounds involving PE and VC firms.
Download the full report, including profiles of the UK’s top 10 crowdfunded companies.