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Brazil and the paths of the world crowdfunding market

Cryptocurrency

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*This article was originally published by the author on her page on Linkedin.

This is the last part of a series of texts on collective investment. If you haven't read the previous article, check out: "4 steps to invest in a startup".

As we saw during this series, collective investment in Brazil is a market under construction. In this journey, the first platforms appeared in 2014 and regulation in 2017, stimulating the growth of activity as a whole.

However, when we compare our market with more mature ones, we realize that we still have a lot to build and evolve. This applies both to the use of this market by investors and companies, as well as to the rules and regulations that allow the consolidation and sophistication of this type of investment.

In this article we will talk about the international investment crowdfunding market, in addition to discussing some Brazilian practices and what we can expect in the near future for this market.

World

According to the latest data (reports published in 2019 for the 2017 market) from the Cambridge Center for Alternative Finance (CCAF), the crowdfunding market, in general, showed an overall growth of 44.2%. And the three dominant countries are China with 86% of the market, the United States with 10.3% of the market and the United Kingdom with 1.88%.

Table: Ranking of the 30 countries with the highest financial volumes in the crowdfunding market. Source: P2PMarketData

It is important to note that these data refer to the total crowdfunding market, that is, it is the sum of financial volumes of all types: donation-based, reward-based, equity-based, etc.

Want to know more about the different types of crowdfunding and their characteristics, check out this article: "Crowdfunding: what you need to know to make money with collective investment".

However, most of this volume is concentrated in loan models (crowdlending). In China and the Americas, this concentration is above 90% and in Europe 60%. Realize that the European market is more mature in other types of crowdfunding, becoming a consolidated reference for the Brazilian market.

Let's look in detail at what makes the European market and, specifically, the United Kingdom an example to follow.

Europe

Analyzing the equity crowdfunding modality, the focus of this series of texts, the European market (except the United Kingdom, which we will deal with separately) showed a strong growth in the financial volume of transactions, going from less than € 20 million to more than € 200 million , in just 4 years (2012-2016).

Graph: Financial volume of transactions related to equity crowdfunding in Europe, except the United Kingdom, in millions of Euros. Source: Statista

However, in 2017, we observed a 3.6% drop in the financial volume of transactions, explained by the strengthening of other types of crowdfunding, such as debit-based securities and minibonds, which grew 229.1% and 186, 4% respectively.

Among the countries we highlight Finland with the largest financial volume, € 51 million, followed by France with € 48 million and Switzerland with € 34 million. The companies that use this modality to attract investments are in the medical technology, environment, renewable energy, software development and service supply industries.

UK

With a 10-year history of crowdfunding, the UK is definitely a success story that we studied with the aim of analyzing the factors that contributed to the consolidation and growth of the market.

Implementing this example in a “tropicalized” way has been the objective of both regulators and agents that participate and promote this environment in Brazil.

When comparing with the rest of Europe, the United Kingdom shows extremely expressive figures, such as a transactional financial volume of £ 333 million in 2017, representing almost double that of other European countries.

Graph: Financial volume of transactions related to equity crowdfunding in the United Kingdom, in millions of pounds. Source: Statista

In the UK, investment crowdfunding remains crucial for small business financing, bridging the gap in fundraising that exists in a startup's life cycle.

If you want to know more about the process and the agents involved in fundraising for the small business / startup, check out this article: “Startups don't just live on Ideas – the Fundraising Process“.

In 2011, only 8 deals were closed through electronic investment platforms. In 2018, crowdfunding investors became the second most active type, second only to private equity and venture capital companies.

The map below shows the expansion of this type of investment for 7 years and the concentration of activity in the southeast region.

Map: Expansion of the crowdinvesting market in the United Kingdom in the period of 7 years (2011-2018). Source: Beauhurst

In addition to this growth, another sign of the market maturing is the increase in the percentage of deals made with startups in more advanced stages or even already established. This demonstrates that crowdfundig has become better known and also more reliable, allowing brands to engage directly with consumers.

Graph: Percentage of business at each stage of the company's evolution. Source: Beauhurst

While in 2013 only 17.6% of the crowdfunding businesses were closed by companies in the Venture stage, in the first half of 2019, this figure reached 40.5%.

Platforms

Currently, in the United Kingdom, there are 41 electronic platforms focused on equity crowdfunding, of which we can highlight: Crowdcube, Seedrs, Syndicate Room, Crowdfunder, Venture Founders, Angels Den, Code Investing among others.

It is worth mentioning that a large part of the platforms simultaneously have several offers in funding. At the time of writing this text, for example, Seedrs had 18 open offers and Crowdcube 21.

Our market is well below these numbers as we saw in the text on Brazilian platforms. This result is a direct reflection not only of a developing market but also of a growing entrepreneurial activity.

In addition, we still do not have the same perception as countries with a more mature market regarding this type of investment.

It often seems to me that the best opportunities do not reach the platforms because they receive investments from angels or groups that are ahead in the search for the next unicorn.

Therefore, platforms end up receiving offers from companies that have not been able to raise investments with other market agents, who look down on companies that have raised money through crowdfunding.

It is worth mentioning that the startups themselves prefer to raise funds through venture capital and private equity over investment crowdfunding.

The result is a vicious circle that does nothing to help the growth and consolidation of this market.

In addition to the large number of platforms and offers, there is the figure of the alternative investment marketplace. These are websites that, in addition to playing the role of search engines, also analyze and rank offers, products and platforms themselves, making it much easier for investors to analyze the market without having to search for information individually.

An example of a marketplace is Nextfin, which offers a series of filters to search for offers. It is possible to search through the category (health and fitness, medical, education, among others) of the platform and the tax incentive (EIS or SEIS), which we will see in more detail in the regulation topic.

Image: Marketplace Nextfin

In the Brazilian market, the figure of the marketplace is still nebulous since, by regulation, platforms are prohibited from using advertising material to publicize the offer outside the platform's electronic environment and also distribute outside that same environment.

Regulations

The establishment of a clear regulation since 2011, by the Financial Conduct Authority (FCA), allowed the platforms in the region to start activities with greater security.

In addition, startup investors in the UK also have tax incentives. The EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) are programs designed to encourage investments in small businesses that in return give the investor a series of tax incentives, such as exemption from earnings as long as these have been after 3 years of investment.

It is worth mentioning that the flexibility of some rules and regulations is usually the natural way for the evolution and promotion of this market.

In Brazil, the Securities and Exchange Commission (CVM) is responsible for regulating this market. Additionally, we have other bodies that also contribute to the development of investment crowdfunding, such as the Brazilian Association of Investment Crowdfunding.

Its mission is to facilitate and multiply seed investment in Brazil, mainly through Investment Crowdfunding, in order to strengthen the country's entrepreneurial ecosystem.

Image: Brazilian Association of Investment Crowdfunding

In addition, the platforms themselves participate in the development of this market by collaborating in public consultations and taking suggestions to the regulator.

But what can we expect from this market in the coming years?

Perspectives

There is no doubt that the development of the secondary market, that is, the possibility of buying and selling among investors, is fundamental for the consolidation of this market in the Brazilian scenario. And the natural way would be to implement trades within the electronic investment platforms themselves, so that each one would have its “trading environment”.

However, firstly, it is necessary for the primary market to grow sufficiently to guarantee adequate liquidity for operations. One way to foster this market is to have rules that allow the sophistication of existing negotiations. For example, the possibility of buying shares of funds that invest in startups.

And one of the ways to test more permissive rules and new business models is through the regulatory sandbox (experimental regulatory environment) that aims to make regulatory requirements more flexible for a limited period of time.

CVM itself placed in public hearing between August and September 2019 an announcement to present the manifestations on the constitution and operation of the regulatory sandbox.

One of the first countries to implement this model of experimental regulatory environment was the United Kingdom, in 2016, with the aim of promoting more competition in regulated financial services through disruptive innovation.

According to one of FCA's post-regulatory sandbox studies, time-to-market, that is, the time to place a product on the market, decreased up to three times after the beginning of this practice. This proves that the sandbox encourages the launch of new services, as the experience eliminates the possible insecurities that could have existed before.

I believe that this may be one of the ways to the sophistication of the crowdfunding market and its consequent growth.

About the author

Tamara Ferreira Schmidt is a physicist, entrepreneur and specialist in the financial market, having worked at ANBIMA and B3. It operates in the area of ​​investments and product structuring, both in traditional and disruptive markets, such as cryptocurrencies and crowdfunding.

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