The Future of Investing in Startups: Equity Crowdfunding

Slice Capital
Mar 15, 2018 · 4 min read

If a crystal ball existed that could show the future for investing in startups, it would show two words: equity crowdfunding. This relatively new investment approach will become the foundation below the startups of the future. Startups need capital, and equity crowdfunding allows everyday investors to provide capital at all stages of a startup’s life. This flow of capital will accelerate startups into outstanding growth. Although there is a veil of uncertainty surrounding the potential for equity crowdfunding, the future data and projections present a clear story about the path of equity crowdfunding.

The Outlook

The next five years look incredibly promising for equity crowdfunding. With a projected compounded annual growth rate (CAGR) around 32.5%, both startups and investors can reap the benefits of this exceptional growth. Founders’ increased access to capital allows for more rampant growth and rapid scaling. Along with access to more capital, startups will have flexibility to pursue certain projects that may have been disallowed by strict VC demands. A typical demand may be relocating out to Silicon Valley, which may not be feasible for some startups. Startups that do not want to relocate would be an example where equity crowdfunding can be a great alternative to standard VC investment.

With all investments, there is a relationship between risk and return. Startups are inherently risky, but investors who seize the opportunities in this emerging field have the potential to be greatly rewarded. Considering the exponential growth of equity crowdfunding along with venture capital returns doubling the average S&P 500 returns, this appears to be favorable for early adopters of equity crowdfunding.

The driving forces behind this overall market growth are deal value (transaction value) and number of campaigns. Equity crowdfunding projections in both of these metrics illuminate the bright future of the industry. The current total value of equity crowdfunding deals rests around $1.7 billion annually and that number is expected to rise to $5 billion by 2022. The campaign growth is not as extraordinary as total deal value; however it is still projected to nearly double over the next five years. There is clearly an opening for startups, investors, and intermediaries to create value in the industry.

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The two terms in the table above are sometimes used interchangeably, but they are fundamentally different. To draw a distinction between the two types of investing above, crowdinvesting (equity-based crowdfunding) “only considers investments in equity shares or profit-related returns (for example, royalties or convertible loans).” Opposed to crowdfunding where investors are not given equity, but receive rewards or products from the company.

The Catalysts

The growth mentioned above will not happen overnight, quite a few catalysts must be present to promote this growth. First, we have the startups. Increasing the number of startups that receive funding through equity crowdfunding should be no issue, given the fact most startups would not turn down more money. Startups are almost always looking for more capital, but the focus here will be quality. There will need to be attractive startups that gain investors attention. Quality can be ensured by thorough research and analysis to guarantee specifications investors want.

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Next, we have investors. Some investors will certainly be skeptical of equity crowdfunding. As with all new alternative-financing ideas, you have the early adopters who capitalize on new opportunities. After other investors see the opportunities these investors are exploiting they will quickly flock to equity crowdfunding as a way to diversify their portfolio. But it takes a huge success story to encourage other investors to take a chance with equity crowdfunding. Once you have the investors and companies on board, an intermediary will be needed to connect both parties. Slice Capital provides a top of the line platform to smoothly connect investors with exciting startups.

The Must-Have Intangible for Success

A trusting relationship is difficult to form, and when it comes to breaking, it is more fragile than glass. Trust is an overarching idea impacting startups, investors, and the intermediaries in equity crowdfunding. Investors must understand the risks, and trust startups will use their capital wisely. With trust comes investment, and with investment comes growth.

Disclaimer: This article does not intend to provide investment advice. The companies mentioned are not currently or planning to raise funds via Slice Capital’s funding portal. Slice Capital does not view the companies mentioned as direct competitors to any of the issuers currently raising on Slice’s funding portal.

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