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November 19, 2019

Business Model Canvas – Equity Crowdfunding

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#Fintech Equity Crowdfunding

Over the course of the last decade, crowdfunding has caught fire worldwide. First, it was Kickstarter in 2009 and the inception of ‘rewards’ or donation-based crowdfunding. Then it was platforms like Crowdcube in the UK who pioneered the equity crowdfunding model in 2012 and beyond. Now, we see platforms and volumes expanding exponentially around the world, with equity crowdfunding becoming a core component of the new venture-capital infrastructure.

How does Equity Crowdfunding make money?

The original business model for donation-based crowdfunding – as pioneered by sites like IndieGoGo, Kickstarter and a host of others – was to charge a % of funds raised. Both platforms charge 5% of funds raised and applicable per-user payment fees. This model is the standard for non-equity crowdfunding, although some platforms may charge a higher or lower % fee based on services offered (ie. video creation).

The mechanism behind both donation-based and equity crowdfunding is effectively the same – connect projects looking for funding with a ‘crowd’ of people looking to fund them. This marketplace business model relies on technology to streamline the process, where online campaigns serve as hubs for those looking to raise funds from their networks – friends, colleagues, connections on social media.

What makes equity crowdfunding so different from the donation-based model is equity, or shares. Equity crowdfunding platforms are required to become regulatory-compliant fundraising platforms in their local jurisdictions. From there, they have to embed their investment model between their technological infrastructure and the regulatory infrastructure in order to ensure that certified shares are issued to funders, and that those funders are legally able to purchase shares in said company.

Some issuance platforms are restricted by geography (can fundraise in some states but not others) or type of investor (accredited vs. non-accredited), for example. As a result of the additional legal and infrastructure cost of both setting up and running an equity crowdfunding platform, they tend to charge higher commissions and have many more bundled services.

As an example, prominent UK-based equity crowdfunding platform Crowdcube charges 7% + VAT on a successful campaign, plus an additional ~1% fee on payments. Factoring in that these services also have a network of partners for things like video creation, media, and marketing, etc, fees can trend higher than 7%. On aggregate, we assume that equity crowdfunding platforms make 7-10% commission on funds raised.

Community-Centric or Commercial-Partner Strategy?

What made crowdfunding as a whole so fresh during its inception was the idea that it was a 100% grassroots, community-based engagement platform.

The early stars of the industry encouraged campaign teams to engage their local communities, work colleagues and, social networks in an effort to fund their idea, pet project, non-profit or gap-year trip to Africa.

This was where the success lay for the IndieGoGos, Kickstarters and other dominant regional platforms of the world. 100% community. But the market eventually demonstrated that this strategy could only work for the dominant donation-based players, as power laws in early-stage markets often dictate.

Equity crowdfunding platforms relied heavily on partnerships to help build a sustainable business model. These platforms needed to model out their respective ecosystems and tap into partner networks for:

>Promising Startups

>Investor Networks (Angels, etc)

>Legal & Regulatory Guidance (ie. Professional Services Firms)

>Media Consultancies and Marketing Firms

Due to the fact that the business model for equity crowdfunding platforms had higher setups and operational costs, they needed to be more efficient at acquiring customers than donation-based platforms; therefore, while still maintaining the community spirit, many platforms employed partner-centric strategies to build a scalable business, both locally and globally.

Fundraising and Valuation

Equity crowdfunding is a unique market for startups compared to most other early-stage Fintech markets such as challenger banks, payments apps or cryptocurrency-based applications. The paying customer in this market are the companies raising equity, they are not mainstream consumers. In this way, the model functions more like an investment bank where companies must build their capabilities, brand, and networks before seeing big returns.

US – Equity Crowdfunding Volumes 2018

In that vein, there was never a flood of venture capital into equity crowdfunding and a consolidation of big players. In many ways, the landscape is still wide open. Data indicates that China, the US, and UK lead crowdfunding volumes, respectively. Within those markets there are typically 2-3 major players, several niche players, and a small set of global players that overlap between markets. To pinpoint exact volumes via equity crowdfunding is difficult, as the sector is still evolving and data tends to be collected for crowdfunding as a whole. Equity crowdfunding will likely evolve to become a subset of venture capital in the future.

Equity crowdfunding’s impact cannot typically be seen by looking at funds raised and valuations of the platforms themselves, but the companies that use these platforms. Many major Fintech platforms in the UK, for example, have built the core of their brands through equity crowdfunding campaigns. As of Q3 2019, UK Fintechs had raised £71mn on equity crowdfunding platforms. As a headline number, it’s not huge; however, when you consider that many of these Series A+ rounds are syndicated with the world’s leading VCs and Funds, you start to see how valuable equity crowdfunding platforms truly are.

Equity Crowdfunding Business Model Canvas

A business model is defined as:

“the rationale of how an organization creates, delivers and captures value.”

Alex Osterwalder et al invented the Business Model Canvas to help individuals and organizations conceptualize how to analyze, create, and develop business models.

Explained - components of the canvas
Business Model Canvas - Index

Value Proposition

Raise equity funds from a distributed group of professional & retail investors through an automated platform

>Compliance, regulatory, and legal guidance

>Tap into new investor networks, aggregate current networks

>Ongoing Investor Relations (IR) and compliance

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