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Funding FinTechs: From Mere Users to Equity Investors

Within the burgeoning alternative finance industry, reserving equity crowdfunding rounds exclusively for customers is emerging as a popular method of fundraising. Startups and scale-ups alike are offering their customers exclusive access to investment, in exchange for a tangible reward in the venture they are funding. Crowdfunding has made it possible for a regular customer to invest in a potential unicorn and reap profits at a level only previously enjoyed by the tight-knit group of venture capitalists. The customer can eventually realize returns through a liquidity event such as a trade sale, secondary market transaction, or an initial public offering (IPO).

The drive to host exclusive crowdfunding rounds is due to companies wanting to reward customers for being pivotal to their growth and offering them the opportunity to profit monetarily from their expansion. This has a few parallels to Initial Coin Offerings (ICOs), where initial users are invited to be investors, in exchange for tokens generally hosted on a blockchain. Equity crowdfunding, however, treats the customer – an integral part of a company’s story – as an investor: a marketing tool for the product. By offering customers a stake in the business, a company creates numerous brand ambassadors, cultivating closer ties with their users.

Armed with a community of investors, these crowdfunding rounds can reach a large number of existing and potential customers, creating information cascades. Challenger bank Monzo raised more than £20 million in 2018, with customers being allowed to invest up to £2,000 through the banking app. Having established a cult-like following with their customers, Monzo utilized their crowdfunding rounds to increase their user base exponentially.

The exposure gained from gaining loyal shareholder advocates also provides a publicly-validated equity value, which founders can leverage in further funding rounds. Currently, global equity crowdfunding deals hover around $1.7 billion annually, with the number expected to rise to $5 billion by 2022.

Opening a funding round exclusively to customers is a way for companies to gather valuable feedback on their current offerings and source ideas for their product roadmap. Customers act as a new source of financing to innovation-driven companies, while the company simultaneously inculcates a sense of brand loyalty. Funds raised are often directed to product development, new hires, and extensive market research.

Fundraising has always been fraught with complexities like regulatory requirements, ceding control to middlemen over campaign length, branding, and ownership of investor data. Laurence Cook of Pavegen concurs, “The terms from venture capital are always restrictive. They want board seats, control, and liquidation preferences. By raising money through the crowd, we were able to raise the money on our own terms.”

It is estimated that more than 600 platforms in 2019 will be leveraged for equity crowdfunding. While the phenomenon is still at a nascent stage, a few companies have gotten ahead of the game:

Curve

Curve, the London-based FinTech that allows customers to consolidate all their bank cards into a single Curve card, raised a record-breaking £4 million in just 42 minutes on September 3. Eligible Curve customers had a 48-hour window to invest £10 and up to own part of the business and gain access to shareholder rewards. Curve’s decision to host an equity crowdfunding round was due to continued demand from loyal customers for an exclusive allocation of investment.

Curve has partnered with Crowdcube, the world's first and largest equity crowdfunding platform. Luke Lang, Co-founder of Crowdcube, explained how the campaign was proof of “harnessing the power of community...into a strategic business milestone.”

Arival

In August 2019, Arival, a Singapore-based digital, crypto-friendly bank exceeded its crowdfunding target of £700,000 by raising nearly £1.2 million in equity crowdfunding. Funds will be used to expand the development of the Arival platform, as the company has applied for an International Financial Services Act banking license in 2018.

Hardbacon

Hardbacon, a Montreal-based company focused on making stock investing simple and profitable for everyone, launched an equity crowdfunding campaign on FrontFundr in June, allowing their clients to invest in the company. The round of financing allowed customers to become Hardbacon shareholders for investments between $99–$10,000. The money raised would be used to hire software developers, a product manager, and a sales resource to enable precise target marketing.

Veriglif

Veriglif is a global verified data network that allows all data stakeholders to connect, transact, and maximize the value of consumer data assets. The company launched a crowdfunding campaign for its users, who can become a shareholder for as little as $1,000. It has raised $224,842 to date and is using the crowdfunding opportunity to invite customers to participate in its success while helping the company reach its objectives faster.

Revolut

In 2017, Revolut opened a $5.3 million equity crowdfunding to its customer base to over 40,000 pre-registered investors via Seedrs, an online investing platform. Revolut users who signed up to Revolut Premium were able to invest twice as much as regular investors.

CEO Nikolay Storonsky said, “Word of mouth by our loyal customer base is the reason that Revolut has achieved so much. As a token of our appreciation, we are offering them the chance to play a longer-term role in the FinTech revolution by owning equity in a fast scaling FinTech as we embark on our global mission.”

As of August 2018, investors who backed Revolut realized returns of ~ 19x on their original investments.

Xinja

Australian neobank Xinja raised $2.6 million from its second equity crowdfunding campaign from 1,447 investors, 203 of whom were repeat investors. Founder Eric Wilson admitted having customers on board as shareholders added a certain element of pressure in a good way. “A lot of customers are investors, and they’re so passionate about it, they will pick up the phone and tell us if they love something or if they hate something… A super competitive advantage for us.”

Democratization of Fundraising

While organizing exclusive fundraising rounds for customers is not a substitute for expert guidance provided by established venture capitalists, companies can use these initiatives to increase investor confidence and unveil new growth opportunities. Offering customers equity as a form of gratitude creates a large volume of loyal supporters, an intangible value that exceeds any marketing investment.

While the chance of monetary profit is a strong motivator for customers, they also prioritize passion for the product and vision and a strong relationship with the venture they invest in. The customers’ investment works as a massive vote of confidence, spurring on a climate of innovation within the company. The additional capital injection increases a company’s chance for success without being impeded by interest payments.

Ultimately, equity crowdfunding for customers is a viable solution as it commercializes innovation, creates jobs, and brings returns to investors beyond the circles of venture capitalism. Democratizing fundraising avenues shifts the spotlight from accredited venture capitalists to customers, the segment that keeps FinTechs operating.


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