What the Last 14 Days Mean for the Crowdfunding Industry
Wow. The last couple of weeks have been fairly monumental for the global crowdfunding industry. It began with a leading player dropping out, then we saw a major acquisition, a stock exchange operator moved in and now - as I write - the SEC are debating the future of crowdfunding in the United States. We've hardly had time to catch our breath.
Here's a quick recap:
- P2P lender TrustBuddy suspends operations, then declares bankruptcy
- Funding Circle acquires Zencap, expands into Europe
- NASDAQ buys SecondMarket, moves into stock trading of private companies
- SEC expected to approve equity crowdfunding in the United States
Two weeks is a long time in crowdfunding
Let's go back to the start. On October 13 TrustBuddy - one of the world's leading peer-to-peer lenders and the first to be listed publicly - halted its operations due to "serious misconduct." It turns out the unfortunately named TrustBuddy is suspected of misusing client money in what was undoubtedly a setback for the European P2P lending industry.
A few days later, on October 19, TrustBuddy filed for bankruptcy and declared it will no longer operate in any form. The Stockholm-listed company had acquired Dutch P2P market leader Geldvoorelkaar as recently as 2014 and was planning a major expansion into the United Kingdom. It's worth mentioning that Geldvoorelkaar remained an independent, standalone business and so - according to TrustBuddy - is unaffected.
"Many have been predicting a major market shakeout in crowdfunding"
So, what does it mean? Well, TrustBuddy started life in Sweden as a payday lender and had been attempting to move into peer-to-peer consumer lending. Apparently they failed to pivot effectively. One of the main reasons given for their bankruptcy was “too much non-performing debt” in its portfolio. This inevitably raises questions about the sustainability and transparency of the P2P industry and its credentials for disrupting retail banking in the near future. Already we're seeing calls for greater European regulation and due diligence.
In any case, we've witnessed the fall of a true pioneer in online finance. TrustBuddy began in 2009 and had ambitious expansion plans in Spain, the Netherlands and UK. Many have been predicting a major market shakeout in crowdfunding. Could this be the start of something bigger?
The dust had barely settled on the TrustBuddy controversy when Funding Circle - another leading P2P lender, active in the US & UK for 5 years - announced the acquisition of rival funding platform Zencap on October 20. The move means Funding Circle expands into Germany, Spain and the Netherlands. Zencap, a Rocket Internet initiative, had lent €35 million to 520 businesses over the last 18 months but is now functioning as Funding Circle, which has lent over $1.5 billion to businesses in the UK and US. The combined entity is set to lend roughly $120 million per month.
"This teaches us that the alternative finance is a complex and ultra-competitive market"
What was the motive behind Funding Circle's European expansion? The market opportunity in mainland Europe is huge, with more than €1 trillion in outstanding small business loans. Co-founder Samir Desai has said they want to become "a household name" across Europe. Yet this isn't the whole story. LendingClub and Prosper are dominant within the US market and it makes perfect sense for Funding Circle to pursue an alternative strategy in continental Europe mainland - a wise choice.
This teaches us that alternative finance is a complex and ultra-competitive market. The Samwer brothers of Rocket Internet don't let their companies go easily, and their decision to cash out rather than invest their considerable resources in growth confirms the sheer competitiveness of the industry.
Perhaps less spoken-about but equally revealing was NASDAQ's acquisition of SecondMarket two days later on October 22. This move sees the stock exchange conglomerate - owner of US stock market NASDAQ and eight European stock exchanges - expand its reach into the trading of shares on private companies. Cue speculation about NASDAQ launching its own equity crowdfunding platform.
Can it be a coincidence that this move happens on the eve of the SEC vote on equity crowdfunding? We can't speculate, but we can say that NASDAQ's decision to move down the securities ladder hints at a future where shares in private companies are freely traded like those of public companies. The endgame of equity crowdfunding is, after all, stock markets for small businesses.
"NASDAQ's decision hints at a future where shares in private companies are traded publicly"
As if all of this wasn't enough, on October 30 the SEC (US Securities and Exchange Commission) will decide upon the future of equity crowdfunding in the United States. This vote has been three years in the making and is likely to result in friends, family, and interested investors being able to invest in startups - as they have in Europe for four years already. The passing of Title III of the JOBS Act is likely to cause a huge surge of interest within the US for (equity) crowdfunding. It would be naive of us not to expect this to cause a ripple effect around the world.
Over the last two weeks we've witnessed the accelerated development of an entire industry. We've seen major market consolidations and repositioning that point to a future where the financing of small businesses happens online, publicly, and between private individuals. There can be no doubt that the crowdfunding industry is still maturing and - as the TrustBuddy case shows - faces significant growing pains. However, with the SEC vote pending, I think it's fair to say we're due for another major growth spurt.
Crowdfunding just hit puberty.