Crowdfunding: The New FinTech Frontier
Over a year and a half ago I joined SeedInvest, an equity crowdfunding platform headquartered in NYC. In the last 19 months, I’ve experienced a growing amount of momentum behind FinTech. With more dollars flooding into the market, more banks recognizing young startups as competitors and new amenable regulations — I’m witnessing the speed of disruption in FinTech moving faster than ever before. And as a result, it’s threatening the stability of large financial institutions, one sector at a time.
Looking backwards, lending grew first. After 2008’s recession, peer-to-peer (P2P) lending marketplaces gained market share in part due to low interest rates, low default rates, a decreased availability of conventional credit, and shifting consumer behavior. This month, Avant Credit became a $1 billion-valued Unicorn and SoFi raised $1B in Series E funding — one of the largest private rounds to date. In the past year, Lending Club and OnDeck became publicly traded companies. What were once considered scrappy startups have now become large, billion dollar competitors to entrenched financial institutions.
Lending is only one piece of the puzzle. On one hand, large financial institutions are adapting and moving in directions they never imagined. On the other, laws are changing, consumer values are shifting, and markets are shaking. Now that lending has proved it’s possible to overcome underlying regulatory hurdles and market monopoly to gain consumer trust, innovators, investors, and institutions are asking — what’s the next FinTech frontier?
There’s a shifting economic, social and political landscape — where, how and why we invest is changing. We’re at a crossroads that will continue to threaten traditional investing notions, like how we approach portfolio allocation.
We’re at a point where money is moving out of the public markets and laws are giving the public an opportunity to invest in the private markets. As I see it, crowdfunding is positioned to boom by both leveraging these changes and by channeling resources into this new market to drive economic growth.
Like lending, the crowdfunding industry is limited by regulations and access but now those key barriers have collapsed and consequently, there’s a newfound opportunity for the industry to become the next big financial sector to watch. It’s been amazing to witness firsthand.
According to a recent Goldman Sachs report, crowdfunding’s addressable market is calculated at $1.2 trillion. Goldman believes that the immediately addressable market is larger than every other FinTech vertical. While rewards-based crowdfunding platforms made up the bulk of the $10 billion of volume in 2014, changing laws, values, and markets are giving equity crowdfunding a real opportunity to fundamentally change the way we invest.
In 2012, Obama introduced a law, which initiated a new wave of investing and financing. Title II of the Jumpstart Our Business (JOBS) Act changed 80 year-old securities laws, giving companies the opportunity to both generally solicit their fundraise and more efficiently raise capital through online platforms. As a result, the early iterations of the American equity crowdfunding industry emerged, creating a new channel for small business and product finance. Still, only accredited investors could participate — leaving out the other 98% of Americans who wanted to finance private, early-stage companies. But like any new market, it took time for platforms to prove this new model worked and because the laws restricted the majority of Americans from participating, there was limited growth.
In June 2015, however, this changed. Title IV of the JOBS Act was implemented and consequently opened the gates for non-accredited investors to help finance companies raising anywhere from $5 to $50 million dollars.
With investing in private companies finally opening-up to 240 million more Americans, equity crowdfunding is well positioned for hyper-growth. The growing lack of trust for the public markets is compelling investors to look elsewhere, equity crowdfunding enables individuals to get access to investment alternatives which were previously reserved for institutional investors. While there’s already been traction, the laws are continuing to move in the industry’s favor. Title III of the JOBS Act is rumored to roll-out by the end of the year. If it does, then all Americans will have the opportunity to invest in a company from day 1.
Shifting Consumer Values
Millennials are entering the market with a different set of values and expectations than previous investors. Millennials still want to find financial success, but they are moving away from the public markets to do so.
Millennials are adopting new streamlined technologies with trust, transparency and accessibility at their core.
According to the Goldman report, “Studies show that Millennials are less invested in stocks compared to prior generations. Millennials hold approximately 52% of their assets in cash and only 28% in stocks, compared to non-Millennials who hold approximately 23% of their assets in cash and 46% in stocks.”
Millennials have more cash on hand to implement their new investment philosophy — where it’s important to invest in companies they both care about and where their money can provide real value.
Equally important is accessibility. Millennials value access and streamlined technology solutions. Goldman described this new trend as the “Socialization of Finance” whereby:
“The combination of increasing mobile-first habits, willingness to share experiences, the desire for perfect information, and the improving unit economics of servicing smaller account sizes is driving changing consumer behavior and the continued adoption of marketplace financial services.”
Through equity crowdfunding platforms, Americans can circumnavigate traditional Wall Street gatekeepers to access early-stage investment opportunities and invest directly in companies where their investment matters and where there’s an opportunity for long-term financial returns.
Markets are Shaking
On the morning of August 24, 2015, the DOW dropped 1,000 points within 10 minutes, the single largest loss in a day of trading. In the one-month since then, we’ve witness continued volatility. The public is looking to distribute assets outside of the public markets to return some stability to their investment portfolios.
Equity crowdfunding is now giving the public the opportunity to diversify into the private markets to adjust away from the turbulence of the public markets. Institutional investors have long known about the counter cyclical or non-correlated returns of private investing. For example, the Yale Endowment fund allocates 31.0% to venture capital and private equity. In the Yale Endowment 2013 Annual Report they noted:
“The traditional 60 percent equity, 40 percent bond portfolios are not diversified, not equity-oriented, and not appropriate for long-term investors.”
There’s no doubt that as globalization continues, there will be more economic risks at play affecting the public markets. As a result, capital (both large and small) will seek new places to find returns.
Investing is changing
If investing standards keep changing and crowdfunding platforms continue to provide solutions for shifting demographics, it’s positioned to become the next breakout FinTech sector, building on the lessons learned in the peer-to-peer lending sector to further transform the financial market.
2016 will be the year that equity crowdfunding goes mainstream. Whether people like it or not, crowdfunding is simply too big of a potentially disruptive force to ignore.
If crowdfunding gets this right and continues to provide Millennials the means to invest how and where they want, there will be plenty of acquisitions, unicorns and IPOs to come. And most importantly, there will be a whole new generation re-engaged in the financial markets.
Equity crowdfunding may prove to be the trigger for Millennials to embrace self-directed investment and in turn, spur a new sense of pride and ownership in small-businesses across the U.S.