Trends Show Crowdfunding To Surpass VC After 2016
By the end of 2016 the overall crowdfunding industry is on track to account for more total funding than the average annual investment from the venture capital industry (according to the most crowdfunding figures published by the most recent report by Massolution).
Just five years ago there was a relatively small market of early adopters crowdfunding online to the tune of a reported $880 million in 2010.
Fast forward to today and we saw $16 billion crowdfunded in 2014, with 2015 estimated to grow to over $34 billion.
In comparison, the VC industry invests an average of $30 billion each year. While 2015 netted out as one of the largest years since 1995 at $58.8 Billion invested, according the the PwC Moneytree Report.
Meanwhile… the crowdfunding industry is doubling or more, every year, and is spread across several types of funding models including rewards, donation, equity, and debt/lending.
And now under new laws enacted in 2013, equity crowdfunding has sprung forth as the newest category of crowdfunding and is further accelerating this growth and disruption (in disclosure I’m part of this market as the CEO of VC fund + equity crowdfunding platform Crowdfunder.com).
Finance Meets The Collaborative Economy
If we look at what is driving this growth and change… we see that the collaborative economy has brought new disruptive models to giant existing industries like real estate and transportation, leveraging automation and the internet to create massively scalable businesses.
For some notable specific examples see this visualization of the sharing economy with data from Mesh Labs founder Lisa Gansky, and the recent Venture Beat report led by Jeremiah Owyang showing 17 new billion dollar valuation companies created within the sharing / collaborative economy.
Many of these collaborative economy companies reached over $1 billion valuations within four years or less.
Next up in the crosshairs of the collaborative economy? The Finance industry — and the growth rates are already exponential. We’re seeing the disruptive power of collaboration online being unleashed on angel and venture capital via new laws and top crowdfunding sites focused solely on equity crowdfunding.
Here are the recent crowdfunding industry growth figures, as reported by Massolution in their 2015 Crowdfunding Industry Report.
Will Equity Crowdfunding Overtake Angel and VC?
The World Bank estimated that crowdfunding would reach $90 billion by 2020. If the trend of doubling year over year continues, we’ll see $90 billion by 2017.
To put that in perspective, venture capital averages roughly $30 billion per year and in 2014 accounted for roughly $45 billion in investment, whereas angel capital averages roughly $20 billion per year invested.
Equity crowdfunding, the newest category of crowdfunding, opened up publicly in September of 2013 under Title II of the JOBS Act and, while restricted to accredited investors only, has grown to an estimated $1 billion invested online. In 2015 the estimate is for over $2.5 billion to be invested through equity crowdfunding.
If equity crowdfunding doubles every year like the rest of crowdfunding has, then it could reach $36 billion by 2020 and surpass venture capital as the leading source of startup funding.
It’s important to understand that crowdfunding isn’t a stand alone funding source. Equity crowdfunding currently includes angel investors and VCs participating online as well. Rather, crowdfunding can be seen as a methodology inclusive of individual and institutional investors like VCs.
There’s just one big difference…
Equity crowdfunding platforms can scale, depending on their model.
VCs can’t scale.
What’s more, the current equity crowdfunding market is limited to accredited investors only. But what happens when an entirely new class of investors of potentially 250 million Americans poised under Title III and Title IV of the JOBS Act are empowered to participate and invest for the first time under new equity crowdfunding laws?
The potential growth and impact could be staggering.
Of course, these new laws aren’t without their critics or risks for investors, as some have pointed out. One of the loudest anti-crowdfunding voices has come from state securities regulators who are largely bypassed by new federal exemptions.
In attempt to proactively address some of these concerns and criticism voiced to equity crowdfunding with non-accredited investors, some new legislation has been in the works on Capitol Hill.
One bill seeks to dramatically increase liquidity opportunities for crowdfunding investors by creating what are being called ‘venture exchanges’ where equity crowdfunding investors can sell and trade shares of private companies.
How Will Angels & VCs Respond To Equity Crowdfunding?
What will the market for startup investing and small business finance look like as equity crowdfunding continues to grow? And are VCs embracing the changes?
Notable venture capitalist Tim Draper stated in a written interview that “…equity crowdfunding gives entrepreneurs access to a new group of investors who might be great assets to their business. I welcome investing in crowdfunded companies. It means that a company has a large number of promoters before I even invest.” (Disclosure: Tim Draper is an investor in Crowdfunder.com, and AngelList.)
Some angels and VCs have begun integrating equity crowdfunding as a step in their investment strategy. Paige Craig, a prolific LA-based investor and General Partner of Arena Ventures, one of LA’s newest venture funds, aims to “activate 10,000 angel investors” alongside the investments they make, using leading equity crowdfunding platforms.
Paige elaborated on the Arena Ventures strategy saying, “I don’t see equity crowdfunding as a tool, but rather a place for true partnership where a fund or VC works in partnership with equity crowdfunding platforms to produce a new form of venture finance.”
Paige Craig went on to say that “funds bring stability, deep pockets and predictability; they are managed by teams of dedicated investing experts who spend every waking moment finding great founders and helping them scale their companies. At the same time equity crowdfunding opens up startup funding to rest of the world — letting engineers, finance pros, real estate, entertainment, small business and Fortune 500 execs participate in the next wave of innovation. When you combine the stability and expertise of a VC firm with the enthusiasm and rich experience of the crowd you get a powerful new force in the funding ecosystem. I don’t know what to call this new model but we believe in it so much it’s exactly what we’re doing at Arena Ventures.“
One of the less talked about impacts the VC world could see from equity crowdfunding involves transparency on investor or fund performance and value-add, which Mr. Craig pointed out saying that “the best equity crowdfunding platforms are (or will be) sharing true performance and historical data on their investors and a lot more. The VC world right now is very murky. As the startup ecosystem participates in these Crowdfunding platforms and shares data the public as well as the LPs, investors and founders will finally get honest access to everyone’s performance.”
But not all VCs want to share the fruits of their labor, and not all founders are comfortable with the more public nature of online fundraising. Equity crowdfunding won’t be for everyone. Expect to see VCs still keeping some deals exclusively for themselves.
Fundraising For Startups Has Never Been Better
The lines are being blurred across the early stage investment ecosystem — some equity crowdfunding platforms are effectively becoming venture funds of their own, like our VC Index Fund at Crowdfunder.com. Meanwhile, VCs are integrating equity crowdfunding into their investment processes due to the marketing and strategic benefits it can bring.
A giant new capital market is taking shape before our eyes, and it is just the early days.
What is for sure is that as access to VC-led deals is increasing for everyday investors and angels, and as equity crowdfunding platforms continue to aggregate investors — the real winners today are the high growth entrepreneurs who have more sources and channels for finding capital than they’ve ever had.