Marriage of Venture Capital and Equity Crowdfunding

The recent ascent of equity crowdfunding (ECF) in the last few years has lured many companies away from traditional forms of investment channels. As this ascent continues, so too does the market share of crowdfunding platforms, who are encroaching on the traditional venture capital (VC) market.

By disrupting the industry so heavily, venture capital firms have had to forgive their initial misgivings about the state and promise of the equity crowdfunding industry, and address its new status as a game-changer, and even be prepared to consolidate with them.

Where does ECF stand in relation to VC?

The democratisation of finance has led to a wealth of options, and a healthy competition amid sectors, which looks set to intensify as the popularity of equity crowdfunding grows. The question of coexistence between venture capital firms alongside equity crowdfunding has arisen in light of statistics suggesting the two modes of investment are on par in terms of popularity. In 2015, the Dutch crowdfunding industry doubled to €128 million from €63 million the year before. Worldwide, equity crowdfunding has already surpassed venture capital firms. Massolution states that $34 billion was raised through crowdfunding platforms, compared to $30 billion via venture capital firms.

Consolidation between VCs and ECF

The public appeal and ambassadors provided by an equity crowdfunding raise differs to the strategy offered by a venture capital raise. The concerns expressed by venture capital firms from the origins of equity crowdfunding, moreover, have proven to be baseless, as public companies show it’s possible to manage a large shareholder base, and as guidelines become clear to assist startups in complying with rules and regulations. Equity crowdfunding validates ideas in a democratic manner, minimising risk and offering a high amount of feedback.

What does the future hold for the two industries?

Resistance to equity crowdfunding on behalf of venture capital firms was to be expected, but as the digital marketplace becomes an increasingly valid, democratic means of investment, it allows the public to discern what are valid products and concepts. This validation could help the longevity of startups funded via venture capital firms, which at present fail 75% of the time.

How does syndicated investment fit in?

We’ve recently published a series of articles on Equitise’s new syndicated investment platform we’re pioneering in the trans-Tasman market. Syndicated investment allows large groups of investors to invest as a single unit. Experienced investors can lead syndicates that are made up of less experienced investors. They forfeit a portion of their profits in exchange for lead investors’ expertise and deal flow – it’s called carried interest.

Where ECF succeeds is its ability to harness the crowd, allowing everyday investors to discover, research and select investments based on their investment knowledge and appetite. Where syndicated investment succeeds is that it allows investors who lack knowledge of certain industries or investments to tap into the expertise and business acumen of experienced investors, ‘leads’. It solves the problem of the knowledge gap that retail investors can have when pursuing opportunities in unfamiliar industries.

Syndicated investment may be the middle ground between ECF and VC. Everyday retail investors can participate in investment alongside established players like VCs and angel networks. Using the same online model ECF introduced, it provides a mutually beneficial platform for seasoned investors and novices.

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