The technology sector bubbles with activity. Scarcely a week goes by without a clutch of takeovers being announced. Start-ups are gobbled up by their larger peers. Companies that have already proved their worth merge or are acquired.
The high-profile, big ticket examples are well known: in a handful of cases, seriously large sums are paid for tech companies that the largest players want to dovetail with their existing operations. Think of YouTube, launched in 2005 and bought the following year by Google for $1.65bn; Instagram, launched in 2010 and swept up by Facebook for $1bn in 2012; WhatsApp, launched in 2009 and bought by Facebook in 2014 for $19.3bn.
Yet in one part of the tech sector, all remains curiously quiet: mergers and acquisitions are rare. Crowdfunding platforms, allowing investors big and small to put money into enterprises seeking financial backing, have seen remarkably little takeover activity.
In the words of Gary Dushnitsky, Associate Professor of Strategy and Entrepreneurship at London Business School (LBS), “This is an island of tranquillity where other sectors are bubbling with M&A activity. Other digital platforms experience bubbly M&A activity; why not crowdfunding?”
The tranquillity was briefly interrupted in October 2018 by the announcement that the US-based cryptocurrency marketplace Circle Internet Financial plans to acquire the crowdfunding firm SeedInvest. Circle hopes that the takeover – which will require approval by the US Financial Industry Regulatory Authority (FINRA) - will help start-ups to raise funds by issuing digital coins.
Marieke Flament, who studied for an MBA at LBS, is now Managing Director for Europe and Global Chief Marketing Officer at Circle. She says: “The concept of crowdfunding is amazing. It makes raising capital for businesses more efficient by having more people able to participate. The world we envisage can allow this to be digitalised and moved to blockchain because it’s much more efficient. We think these two worlds – crowdfunding and cryptocurrencies – will merge.”
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So why does this area of tech remain an island of tranquillity in a bubbling ocean of M&A activity?
From a large data study of crowdfunding in Europe carried out by Dr Dushnitsky and colleagues we know that, over the past 12 years, more than 700 crowdfunding platforms have been launched across 15 European countries. The most active markets have been the UK, the Netherlands, France, Germany, Spain and Italy. Of those 700-plus operations, roughly 200 have simply withered away.
But that still leaves a large number of platforms jostling with one another in the same space.
With some takeovers elsewhere in the wider technology arena, it is easy to see the driving force, easy to see how a takeover can add value.
One driver could simply be the number of users, particularly where there is a “network effect” – where the larger the number of people on the platform, the greater the benefit for the individual user. That helps explain the takeovers of YouTube, Instagram and WhatsApp. But, as Dushnitsky says, “In the case of crowdfunding platform, it’s an open question whether having more users is valuable.” The goal is not simply to have more users, but instead high-value users – entrepreneurs with genuinely promising business ideas on the one hand and active investors on the other, rather than “tourist investors”.
What about the technology that a given platform uses? Might a platform have a unique technology that is superior to its competitors and therefore offer value to an acquirer?
In theory, that’s possible. Dushnitsky points out that a crowdfunding platform might have the technology to work across countries and in multiple languages: “Who says that that a French-based platform need operate only in French? Maybe if it can also work in English and Spanish as well, that would increase awareness.”
In truth, working in several different languages is relatively simple. Clearing payments in different currencies is slightly more difficult, but certainly manageable. Having these skills is unlikely to make one platform vastly more valuable than its competitors.
“Technology is probably not a unique differentiator, or at least not the full story,” Dushnitsky adds. “I have not seen a situation where a crowdfunding platform has been acquired where the argument is because it has a superior technology.”
Look at a third dimension where a crowdfunding platform might have an edge over rivals – its ability to identify the strengths and weaknesses of investee companies. A venture capital fund might make a handful of investments over its life – perhaps as few as half a dozen.
On the other hand, a crowdfunding platform might facilitate investment into scores or even hundreds of businesses looking for funds. Writing an investment memorandum for each of hundreds of investees presents a very different challenge to that faced by the venture capital fund. “If you are able to do that right, then you might be able to unlock real growth potential,” says Dushnitsky. That ability to streamline the project onboarding process could be important. Perhaps that could be become a driver of growth.”
The number of investors and investees was mentioned by Circle as one of the reasons for buying SeedInvest.
But significantly, a major consideration highlighted by Circle was the fact that SeedInvest has already cleared regulatory hurdles set by the US Financial Industry Regulatory Authority (FINRA) to allow it to operate.
Dushnitsky says: “Fintech companies work in a regulatory-intense environment and regulatory compliance may be as important as product-market fit. In fact, a company might achieve product-market fit only to find that it’s violating money-laundering laws. Regulation is a crucial differentiator between fintech companies on the one hand and advertising or retail platforms on the other.”
When the SeedInvest deal was announced, Jeremy Allaire, CEO of Circle was candid about one of the key reasons for his company’s having identified SeedInvest as an attractive target – the role the company had played in pushing for the Obama Administration’s JOBS Act. The legislation – the Jumpstart Our Business Startups Act to give it its full name – eased regulations to make it easier for companies to use crowdfunding to issue securities. Said Allaire: “[SeedInvest] helped create the JOBS Act.”
Assuming the Circle-SeedInvest deal is approved, it should bring the fintech company closer to listing cryptocurrency tokens that can be seen as financial securities. However, as Flament points out, the regulatory framework across Europe remains fragmented.
The question of what makes a crowdfunding platform an attractive M&A target remains unanswered. But sure-footedness in navigating the regulatory environment may be one element. Meanwhile, takeovers remain a rarity.