Crowdfunding a mission to save capitalism from itself


Jeff Lynn is on a mission to save capitalism from itself at a time when millions feel locked out, and unable to foresee themselves better off than their parents. His answer: to democratize capital.

That is one reason he founded Seedrs, an online platform through which individual investors can buy shares in high-growth companies at an early stage — a privilege once reserved for institutions and private equity funds. The other reason was to make money.

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    He believes the service will give the middle class a greater stake in a capitalist system that has become skewed towards the rich.

    While the wealthy have always been able to take advantage of alternative high-growth investments, governments barred others from doing so for their own protection. They thought “everyone else is a complete blithering idiot”, Mr. Lynn says. “There is a vast number of people out there, particularly with the levels of information that are available today, who are able to understand risk, who are able to make sensible decisions, who may not be fabulously wealthy but should be able to get much wealthier. That’s how capitalism is supposed to work. Maybe they can’t put £50,000 into every private investment they do, but would love to be able to put £500, or £5,000 in.”

    Seedrs, which along with Crowdcube dominates the UK market, has funded more than 540 deals, representing £280m of investment. Some were follow-on rounds, and in total about 400 companies have been funded. About 20-30 companies are live on the site at any time.

    Mr. Lynn believes crowdfunding is part of the solution to the rise of populism, saying that policymakers should focus not just on the income gap but the wealth gap. Many salaried workers see the assets of the rich, such as housing and art, rising in value far faster than wages. That leads to resentment and the rise of figures such as Donald Trump.

    Crowdfunding — where companies raise money directly from individual investors, usually online, rather than via institutions — has taken off. Most sites lend money, undercutting the banks and offering a better return on cash. Seedrs, Crowdcube, and equity crowdfunders allow investors to buy stakes in a business from £10.

    Tennis star Sir Andy Murray is the public face of Seedrs, and presumably he can afford to back the odd loser. “This is a high-risk asset class; nobody should invest in this with money that they can’t afford to lose.”

    Mr. Lynn, 39, is from the U.S. but has lived in the UK for 12 years. He founded the business five years ago with Carlos Silva, who is Portuguese — the men met on an MBA course at Oxford Saïd Business School. Mr. Silva’s landlord put in £30,000 and connected them with other angel investors.

    “I was a deal lawyer, I was doing M&A and corporate finance. I wanted to do something entrepreneurial,” Mr. Lynn says. He now wants to supercharge the site by persuading institutional funds to invest in portfolios of companies on the site. He has stepped up to chairman to lead that strategy and has recruited Jeff Kelisky, another New Yorker with tech-sector experience, as chief executive. “I was spread too thinly,” said Mr. Lynn. It was time for the founder to hand over to someone “who had done this before and wasn’t learning as he went”.

    The two Jeffs want to offer institutions a way to tap into high-growth companies that offer diversification. Some analysts question whether this will crowd out the very small investors that were supposed to benefit. “We have no desire to move away from the small investors, and there’s absolutely no reason to,” Mr. Lynn says.

    The Seedrs office is in Old Street, the heart of London’s tech cluster. It is as much a tech as a finance business, says Mr. Lynn. In October 2017 it raised £10m, with £4m from UK fund manager Neil Woodford, known for his belief in long-term, small-cap investing. So is it better to invest in Seedrs or the companies on its platform? Mr. Lynn is non-committal. Some of its customers will “hit the moon and beyond”. However, he draws an analogy to the California gold rush, where those who made the most money were often those who supplied the miners rather than dug for gold — such as clothes-maker Levi Strauss. “Rather than trying to pick which mine is going to have the gold, you back the folks selling the picks and shovels to the miners.”

    He has statistics to back this. The 2017 fundraising round valued Seedrs at £50m. Its last round in August 2015 had valued it at £30m. The share price is up 136 per cent since its December 2013 round — though Seedrs remains lossmaking.

    More than 2,000 existing shareholders and new customers, from 35 countries, have invested an average of £3,200. Sir Andy was one. (He has also backed 30 companies on the platform.)

    Seedrs makes money by taking roughly 6 per cent commission on funds raised, and then a share of any increase in value when the company is sold — similar to the “carry” earned by private equity firms. This means it is less reliant on fresh deals to make money than peer-to-peer lenders.

    It expects to turn over £2m this year and to lose around £4m, but Mr. Lynn insists profitability will come “within a few years”. Seedrs funded 100 companies in 2016 and expects to surpass 150 this year, and 10 times that in 2022.

    Crowdfunding by numbers

    Critics say a big difference between crowdfunding and the stock market is liquidity — you cannot just sell your stake. But Seedrs has begun a secondary market and says it has had several exits already.

    Some companies have been sold to trade buyers, such as Aviva, the insurer. Debenhams, the retailer, took a stake in Blow, an on-demand beauty service, and offered to buy out investors. The sale price was more than three times the price at which Seedrs investors invested in the first round.

    Free Agent, a Scottish maker of accounting software, floated in November 2016 at 87p. Its shares remain below the 100p Seedrs investors paid, though some sold when it hit 140p this year. Chapel Down, a vineyard, was already quoted on the Nex exchange (formerly ISDX) when it raised money at 28p a share in October 2014. It has been trading around three times that level.

    In the year to September 30 2016, Seedrs investors received an annualized rate of return of 14.44 per cent. It increased to 49.1 per cent for those taking advantage of tax reliefs. The company looked at 375 companies that raised money on the platform between July 2012 and September 2016. These businesses delivered an average internal rate of return of 14.4 per cent, if priced at “fair value” at that date.

    Overall about 15 per cent of companies had lost value — many of those could be worthless — while 29 per cent increased in value. Mr. Lynn says that of 539 deals completed, 92 have wound up or were in the process of doing so by the end of November 2017. “The majority of investments in this asset class will go to zero — that’s the nature of a high-risk, high-return asset class — and the goal is to build a diversified portfolio where the handful of winners do well enough to provide outstanding returns across the whole portfolio.”

    In the early years of peer-to-peer lending, some small operators failed. Mr. Lynn claims new regulations are sufficient. “I am very much pro-regulation. The UK has been really first in the world in terms of getting the balance right.” The Financial Conduct Authority took responsibility for the sector in 2014.

    Only about a fifth of the companies wanting to join the platform are accepted. Seedrs checks the background of directors, the claims made in their campaigns, including the ownership of intellectual property, and that shares are of equal worth rather than a dual structure.

    Of those, 40 per cent raise the money they need. But the platform is now actively seeking companies and is doing more due diligence.

    The business has offices in Amsterdam, Berlin and Lisbon, and hopes to be truly pan-European within a few years. Mr. Lynn believes the system needs more equity investments, which favor long-term thinking.

    “I like equity. I like the alignment of incentives, I like the idea that if things go well you share in it together, if things go badly you don’t. I don’t like debt, instinctively; it’s an adversarial relationship.”

    “In some ways what we do is really rather boring and old-fashioned,” he says. He compares it to a 17th century merchant which would sell shares to fund a trading trip. If he crashed on the rocks, his backers lost everything. If he came back with a cargo of spices, they all got a big payout.

    And Seedrs’ “mission”, he says, is to make capitalism deliver for more people. “All of the complex derivative instruments, the weirdness, that emerged in the past 20 years in particular is a historical aberration,” he says. “I believe in capitalism, but I believe in it being done the right way.”

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