Investing in the fintech sector via equity crowdfunding provides investors with the opportunity to create a large enough portfolio to optimise returns and is showing attractive returns on paper.
One of the challenges for most investors in private, early-stage companies is finding enough opportunities to invest in to create a diversified portfolio. Crowdfunding offers up a range of such investment opportunities which can easily be accessed by any investor.
We have therefore analysed what the potential returns might be for investors in fintech crowdfunding cases by analysing all of the fintechs which sought their first round of crowdfunding investment in the UK between 2013 and 2017*.
It turns out that investing equally in all 47 of these companies would have resulted in an internal rate of return (IRR) on paper of 46% (based on the valuation at the most recent round of funding), and the return multiple would have been 15.9x. Note that this assumes the benefit of EIS allowances in each case.
However, only 4 out of the 47 companies have achieved an exit and the realised return so far is only 12% of the adjusted capital invested. Revolut and Freetrade have offered early exits to crowdfunding investors and if this option had been taken then 204% of the initial capital would have been returned to date, although the IRR for the whole sample by exiting early in these cases drops to 27%.
Of the 47 companies we analysed, 19 have already closed. Many more appear to be going nowhere, and the returns on paper from the sample rely heavily on a handful of cases – particularly Revolut, Freetrade, Monzo, Chip, Landbay and Plum. These companies need to achieve successful exits for the attractive returns that exist on paper to be realised.
It is widely reported that fintech valuations have fallen recently but even allowing for a 50% adjustment down from the valuations achieved at the most recent funding rounds, the IRR for investors on paper is still 33%.
Returning to the original point about the size of portfolio an angel investor can achieve, using a Monte Carlo simulation we have also looked at the returns from different sizes of randomly constructed portfolios. The median IRR for a portfolio of 10 companies is around 26%, whereas for a portfolio of 20 companies it is around 40%. With the larger portfolio, there is only a 4-5% chance of getting an IRR of below 15%.
This result is essentially because there is a greater chance of getting one of the big winners in the larger portfolio. As winners are very difficult to predict at the outset, it would appear that a very broad-based approach to investment would make the most sense with a portfolio of 20 or more companies.
One final point for investors is that the past does not of course predict the future. We don’t know whether future cases of crowdfunding in fintech will be as attractive as some of the cases in this sample, such as Revolut. It may be that the successes we have witnessed in the early stages of the fintech revolution will not be repeated.
* Seedrs and Crowdcube platforms only