Equity Crowdfunding : the new addition to the financing marketplace.

In the second part of our series on “How Fintech is disrupting SME and Start up Financing”, we present to you the trends in equity crowdfunding.

Crowdfunding has gained phenomenal traction as an alternative source of Start up and SME financing over the last six to seven years. Crowdfunding platforms are increasingly bringing more investors to finance Start ups and SMEs.

Equity crowdfunding is the process of a large number of investors funding an Start up or SME for an equity share.  An online marketplace, equity crowdfunding has automated the traditional equity financing.

The automation has unleashed an investment opportunity that was once reserved for the wealthy business angel investors and venture capital. Now the crowd also comprises sophisticated investors and high net worth individuals


 

In the UK, equity crowdfunding had raised £332 million worth of capital in 2015. Its share in the UK seed and venture funding also grew to 15.6% in 2015 from a negligible 0.3% in 2011. The country ranks #1 amongst all the European nations with 28% of crowdsourcing platforms at a count of 143.

Crowdfunding – a spark in the financing marketplace

While the estimated value of capital raised globally by crowdfunding is $34 billion, the venture capital’s yearly average is at about $30 billion.

In the UK, amongst the finance investors – such as angel investors and VC – only equity-crowdfunding witnessed a 45% increase in deal volumes (2014—15).

Equity-crowdfunding also led seed-stage rounds in 2015. All this, while the number of deals securing equity investments in unlisted UK start-ups and high-growth companies fell annually by 18% to 1,203 in 2016. Total investment also reduced annually by 12% to £3.6 billion. Yet it was business as usual, and even better, at crowdfunding platforms.

The future of equity crowdfunding

The fact is, with equity crowdfunding, some of the entrepreneur’s control shifts to the investors. If the crowdfunding project were to fail, the perception of the venture’s worthiness is at risk. This makes it difficult to avail funds from other sources and for future projects. Information disclosure to ‘stranger’ investors risks the entrepreneur’s idea being stolen and replicated. Having said that, an entrepreneur participates in crowdfunding for the crowd’s wisdom to learn and improve.

Besides financial motivation, investors participate in crowdfunding for social and intrinsic motivation. Supporting such a project is an expression of their beliefs, values and preferences. However, there is also the fear investors of the entrepreneur misusing their funds

On the back of these drivers, a significant development is an increase in niche platforms. As generic equity crowdfunding platforms flood the market, the industry will look to more specialised crowdfunding sites for growth. These sites would provide niche services such as connect and collaborate with like-minded people. Many websites are already deploying search technology that finds the right demographic of investors and build a sector- or niche-based community.

  • Locodor and SmashFund are an example of new platform that combines crowdfunding and social networking
  • Real estate crowdfunding has grown to an estimated $3.5 billion in 2016.

These developments are likely to encourage investors’ attitude to fund businesses they believe in.

The future of equity crowdfunding thus seems to based more on the network of like-minded investor and entrepreneurs.