Crowdcube co-founder and CEO Darren Westlake.
LONDON – UK startup investment platforms Crowdcube and Seedrs will team up in an industry-shaking deal that will create an equity crowdfunding powerhouse worth £ 140 million (US $ 181.4 million).
Crowdcube and Seedrs, founded after the 2008 financial crisis, messed up the capital markets by allowing the public to buy stocks of early-stage companies to raise money.
This enabled many start-ups – including the finance apps Revolut and Monzo, as well as the up-and-coming brewer BrewDog – to raise capital without having to approach venture capital or angel investors directly.
The two companies, both of which are making losses, announced Monday that Crowdcube will acquire all of Seedrs 'outstanding share capital, with Crowdcube's existing shareholders owning 60% of the combined company, while Seedrs' investors will own 40%.
Crowdcube is valued at £ 84 million based on its latest round of donations, while Seedrs is valued at £ 56 million, meaning the combined company will be valued at around £ 140 million.
Seedr's boss Jeff Kelisky will serve as CEO of the combined company, the companies announced, and Crowdcube boss Darren Westlake will serve as executive chairman.
"We've known each other for a long time," Westlake told CNBC on a call, adding that talks with Seedr's co-founder Jeff Lynn began in 2017. "It was a long process for us internally, but also externally, market observers saw the advantages of merging the two companies."
Westlake and Kelisky said both companies saw increased demand during the coronavirus pandemic – the third quarter marked a "record" for crowdcube – as startups pressured to view crowdfunding as an alternative to traditional fundraising methods.
"Companies need capital to make it through this time, and a lot of investors want to help them," Kelisky told CNBC. "So we've had a tough time, partly driven by this need."
Although neither executive was able to discuss the integration between their platforms, Westlake said the long-term goal was to "attack the global equity crowdfunding market" as one company rather than two separate companies.
Charles Delingpole, co-founder and CEO of the London-based regulatory technology startup ComplyAdvantage, said the merger was a "fantastic result," bringing together "two extremely powerful equity-raising platforms and investors with larger scope, higher liquidity and greater choice brings great benefits. ""
"Doubling up with two parallel exchanges is not optimal, and a single champion exchange ensures that more can be invested in a variety of features and opportunities for everyone involved," Delingpole told CNBC.
The combination could allow Crowdcube and Seedrs to develop and consolidate their secondary market offerings so that people can buy shares of companies from existing investors. This funding strategy allows early shareholders to cash out without the need for an IPO.
"I wonder if this opens up an entirely different asset class for trading, to the point where this secondary market is almost becoming a competitor to traditional stock price," David Brear, CEO of fintech advisory firm 11FS, told CNBC.
Brear said both companies have campaigned for businesses to get their customers to buy into their stores, adding that it is linked to "PR and branding benefits" not found with traditional fundraising routes are. He also noted, however, that the deal came as a surprise as the two companies "were somewhat opposing at the time".
"This is the equivalent of Monzo buying Starling or Starling buying Monzo," said Brear. Monzo and Starling, two digital banking startups, have been known to have been competitive over the years.
Crowdcube and Seedrs claim a total of £ 2 billion has been invested through their exchanges since 2011. The merger agreement, which is expected to close in early 2021, has yet to be approved by the UK's competition and market regulator, Financial Conduct Authority and Shareholders.
Oliver Kicks, an employee of London-based venture capital firm RLC Ventures, said he was "a little concerned about the consolidation of the market as entrepreneurs have fewer choices".
"The lack of choice could ultimately lead them to accept worse terms / higher fees, while you can imagine that previous competition between companies resulted in competitive prices / terms."