ECF: An Overlooked Fintech Area

If you hadn’t noticed, the financial system is a bit of a mess (again).

Deutsche Bank, the German megabank, announced $7 billion in losses back in February. The stock is now trading at just over one-quarter of its book value.

Deutsche Bank has an astounding $64 trillion in outstanding derivative contracts on its books.

Meanwhile, one-quarter of all government bonds now have negative yields.

Bondholders are paying for the privilege to lend. And when governments do pay the money back, it doesn’t buy as much as it used to due to inflation.

Bill Gross summed it up well in his most recent investment outlook:

The primary problem lies with zero/negative interest rates; that not only do they fail to provide an “easing cushion” should recession come knocking at the door, but they destroy capitalism’s business models.

Central bankers, like modern alchemists, are attempting the impossible – eternal growth via eternal market manipulation.

The current financial system is clearly unsustainable. What will replace it?

Change and Opportunity

As bankers focus on layoffs, self-enrichment, and lobbying governments to ensure future bailouts (or bail-ins), innovative startups are aiming directly at their core businesses.

Wealthfront is a good example. This private startup is disrupting the traditional money management business.

Founded in 2011, Wealthfront has already amassed $2.8 billion under management. The “robo-advisor” accomplished this feat using low-cost Vanguard index funds and AI-driven portfolio management.

Paypal (the original financial tech disruptor) is on track to top $10 billion in revenue this year. Its recent acquisition of mobile/millennial payment company Venmo appears to be paying off.

But it’s a bit late in the game to invest in digital payments and robo-advising startups. They’re now both crowded markets with established disruptors on the rise.

Today I want to look at an overlooked, underinvested area of fintech: equity crowdfunding itself.

When Opportunity Knocks

At some point in the near future, it’s highly likely that one or more ECF portals will raise money on their own platforms.

U.S.-based investment portals SeedInvest, Wefunder and MicroVentures have all previously offered shares to their members. But that was back when only accredited investors could invest in private deals (We recommended all three to members of Startup Investor, our service for wealthy individuals.)

Now that things are open to the public, portals would be wise to offer shares to non-accredited folks – to gain loyalty and give members a reason to invest through their platforms.

This model has proved effective over in the U.K., where ECF is more established and growing like mad.

In 2013, London-based ECF portal Crowdcube offered members the chance to invest at a roughly 5 million pound valuation.

Today, three years later, Crowdcube has completed a raise of 9.3 million pounds at a 65 million pound valuation.

That’s a handsome return for investors in just 36 months. And there’s plenty of growth ahead for Crowdcube.

But don’t feel like you missed out. The U.S. ECF market is finally live, and the opportunity here is just beginning.

ECF in America offers a far bigger and more attractive opportunity than ECF in the U.K. We have the most advanced startup ecosystems in the world.

So when the first U.S. ECF portal offers its shares to the general public, be prepared to act decisively.

The opportunity will likely fill up fast. If the investment portal is one we’re bullish on, First Stage Investor members will be notified immediately about the opportunity.

It will be a chance to invest in a “pick and shovel” play in what’s shaping up to be a multibillion-dollar market. And those don’t come along too often.

Have a great weekend.

Adam Sharp
Founder, Early Investing