Why criticism of regulators on Seedrs US buyout is overdone

Some consequences are difficult to foresee. The sale of UK fintech Seedrs to a US buyer, eight months after the UK competition watchdog blocked a domestic tie-up, was not.

Seedrs runs an equity crowdfunding platform. It matches wannabe start-up investors with wannabe entrepreneurs in need of cash. The trouble was, Seedrs shared some characteristics with the companies that used it to find backers: it was still a relatively small business burning through cash.

In its search for growth — and profitability — it turned to its closest rival, Crowdcube. Unsurprisingly, the UK Competition and Markets Authority had something to say about a merged business that would control more than 90 per cent of the domestic market. So Seedrs found itself a foreign buyer in the form of US retail investment platform Republic, and a $100m valuation. Crowdcube secured itself a healthy chunk of financing from a US cryptocurrency company.

It is easy to caricature the outcome as the inevitable result of an out-of-touch regulator paranoid about giving tech companies a free pass. In that telling, Seedrs is another UK tech business sold too early to a foreign buyer, and the aborted deal with Crowdcube a lost opportunity to create a national champion in a niche but growing sector.

And the CMA does tend to give its critics ammunition. It has picked some unusual fights. There is its years-long obsession with the takeover of small UK sneaker chain Footasylum, blocked not once but twice. There was also its decision to do battle with Facebook over its purchase of a library of silly graphics.

Its decision on the Seedrs-Crowdcube merger belongs on that list, the CMA’s detractors say. Seedrs co-founder Jeff Lynn told the Financial Times at the time that the regulator had taken an “old-fashioned and academic view” and “[failed] to recognise the realities of how innovative sectors work”. Tim Levene of Augmentum Fintech, an early investor in Seedrs, points to the “vision and flexibility” of the Financial Conduct Authority and Bank of England in encouraging the country’s fintech community to flourish. “Down the line the second-tier bodies will need to get match fit, as there will be other fintechs seeking scale by merger,” he said.

But the problem is that Seedrs’ sale seems to bear out some of the watchdog’s objections. The companies justified the merger on the grounds it was their only real option for growth. The $100m sale of Seedrs and a $13.5m funding round last month for Crowdcube rather suggests other choices were available after all.

It also seems wrong to criticise the CMA for its failure to facilitate a future fintech champion. It is questionable whether the government should be in the business of picking winners. The competition regulator certainly should not be. Neither is it its job to insulate UK companies from foreign ownership. The openness of Britain’s capital markets has long been one of its strengths.

That does not vindicate the CMA’s original intervention. Seedrs and Crowdcube control 90 per cent of their market only if you define it in the narrowest possible way: that is that they are vying almost entirely with each other to fund businesses, ignoring venture capitalists and angel investors.

Many in London’s fintech community don’t believe the market is this limited. Instead, they envisage equity crowdfunding as one option among many for early-stage businesses seeking backing. The risk is that by battling it out against each other, rather than competing against rival sources of capital, neither Seedrs nor Crowdcube will ultimately survive. That would clearly be bad for competition.

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But in the meantime, both businesses have new backing. The market is also opening up in Europe thanks to regulatory changes. That gives both scope to expand.

There still remains what one fintech founder describes as the “perennial criticism of UK scale-ups . . . that they are sold too early”. But as that founder notes, the criticism “is partly a reflection of the investment climate, ambition of management teams and relative size of the UK economy”. Not all of which can be laid at the door of the CMA.

cat.rutterpooley@ft.com