In 2010, AngelList began to use the internet to disrupt the traditional early stage funding model, allowing individual angel investors to engage directly with early stage companies, access their ideas and plans, perform diligence, and individually fund, or pool capital in support of early stage deals – democratizing the investment process for accredited investor participants. In line with this and other developments, angel networks, empowered by the Internet and an ability to share information, began to expand their reach, at the same time as VC’s began to look for less-risky upstream investments where their capital strength and pricing power relative to risk was more advantageous.
The onset of the financial crisis in 2008, which caused institutional investors to pull back from financing early stage businesses, left the capital markets with a significant funding gap for early stage ventures. Other disruptive models appeared and achieved success, such as donation, debt and reward-based crowdfunding campaigns. This emergence, the advancement of these models globally, along with the continued lack of access to early capital particularly in the US, led to pressure in the world’s largest private capital market to change the rules of the game and ultimately the passage of the JOBS Act In 2012.
The 2012 JOBS Act set the stage for 2013’s implementation of Title II, which lifted the ban on general solicitations & advertising of securities, where the purchaser is an accredited investor, as well as the 2015 implementation of Title IV, popularly known as Regulation A+ which allows both accredited and non-accredited investors to participate in what are often termed ‘mini-IPOs’ – the first expansion of private investment opportunities to the non-accredited investor base in the US since 1933. With Title III of the JOBS Act set to provide a further significant expansion of equity crowdfunding for non-accrediteds, what is occurring is the very beginning of “collaborative” capitalism. Crowdfunding has activated communities of interest and emerged as a new channel for fundraising, product validation, market testing, and customer engagement.
Now, jumping back to the VC’s:
The 2015 Massolutions Crowdfunding Industry Report estimates that the total annual value of all crowdfunding deals could reach $90 billion by 2020. To put that into perspective, venture capital funding approximates $30 billion per year, whereas angel capital funding approximates $20 billion annually. Equity crowdfunding, specifically, is projected to reach $36 billion annually by 2020 and to surpass venture capital as the leading source of startup financing.
Crowdfunding, however, is not likely to develop in isolation – it will be inclusive of both individual and institutional investors, with the likes of traditional angel investors, VC’s, and other institutional players participating in online platforms. But equity crowdfunding platforms maintain a unique advantage over traditional model.
Equity crowdfunding platforms can scale in a way that VC’s can’t, by appealing to a much broader audience with a smaller ‘bite size’. They are more able to rapidly test and evaluate a larger volume of deals, in a larger laboratory – and thus intelligently deploy the larger volumes of capital that the market seeks to put in play. In the words of Fred Wilson of Union Square Ventures, “My concern is that the venture capital industry, as it’s organized today, can only put to work $15 billion intelligently. That doesn’t mean that more money can’t be put to work intelligently. It just means that we can’t figure out a way to do it.” So what happens when an entirely new class of investors is empowered to invest for the first time? Staggering growth and impact.