Although crowdfunding returns are generally low, Freetrade has reversed the trend by accepting investors in early — and is successful.
It was in September 2016, a little-known trading app “Freetrade” launched a crowdfunding round expecting to raise £100k from ambitious retail investors.
The odds of success were low — most crowdfunding investors had never see a return on their money.
However, at least six crowdfunding investors purchased stakes in Freetrade and that these stakes are today worth at least £1m.
This success followed Freetrade’s recent fundraise, which valued the company at £265m, having already attracted over 600k customers to the low-cost trading app over the last 5 years.
Low-cost trading app
According to Sifted estimates, Crowdcube investors who invested a minimum of £18,750 in 2016 will now own shares worth £1m or more. One individual, who doubled down in subsequent rounds, now even going to own a stake worth £8.4m, according to Companies House filings.
Apart from Millionaires, anyone who invested just £210 in 2016 will now have a (tax-free) stake worth £10k.
In total, 143 crowdfunding investors took part in the 2016 round. As of now, their return on investment (ROI) is estimated at 4670% (or 47x).
The company has now completed seven crowdfunding rounds, counting 13k investors overall. What this means is that retail investors are actually, now, Freetrade’s “largest direct shareholder”, jointly holding a bigger stake than its VC backers like Draper Espirit.
Freetrade also recently offered the opportunity for its retail investors the chance to cash in some of their winnings via a secondary sale, citing an oversubscribed Series B. It is expected that over the next few weeks, institutional investors will buy shares off those who wanted to sell via Crowdcube (possibly at a slight discount).
Mixed bag of success and failures
Freetrade’s crowdfunding story is an odd man’s success story. A study found that the average rate of return in crowdfunding is just 8.6%, against the startups’ low survival rates.
Most of the startups also don’t usually launch crowdfunding campaigns until Series B or later as the return multiples are far smaller. For instance, fintechs like Curve didn’t do its first crowdfund until it had already reached a $250m valuation.
Freetrade’s returns currently even trump the likes of Monzo, which is now worth £1.2bn. Crowdcube told Sifted that Monzo’s investors’ shares have up 15x in value since its 2016 crowdfunding round.
Equally, Revolut also did its first crowdfunding round in 2016, expecting for a £42m valuation (it’s now worth £4.2bn). However, Revolut capped crowdfunding investors at £5k each as even the largest investors won’t hit million dollar returns.
Crowdfunding campaigns have also been criticised for their lack of financial disclosures, often leaving crowdfunding investors in the dark.
There have also been some grumbles among Freetrade’s Crowdcube investors. Online forums document a handful of communication concerns, and confusion over the status of A shares versus B shares (hence, the removal of voting rights). However, Freetrade now only offers B shares for its crowdfunding investors.
In response, Freetrade chief executive Adam Dodds said:
“From the start, our crowdfunding investors have been our biggest supporters and we’re thrilled to be able to offer them a chance to realise the gains that they have made on their investment, if they chose to take up the secondary offer. We’re committed to building a company that helps millions achieve better financial outcomes and, at the same time, keeps our interests aligned with those of our shareholders.”
