The Future of Equity Crowdfunding : is it viable for long-term growth and industry sustainability?
Equity Crowdfunding has captured the imagination of the public and will be remembered as one of the disruptive financial innovations of this generation.
Post-2008, many of the banks stopped lending to startup companies and equity crowdfunding brought the world of SME financing into the public domain and kick-started the UK startup scene by allowing retail investors to invest in exciting young companies. It truly was the democratisation of finance!
As the excitement begins to settle, however, concerns have begun to surface over the impact of crowdfunding, especially in terms of the possibly overinflated valuations of some companies and, in relation to some platforms, the lack of investor protection.
So what must crowdfunding do to cement itself as a mainstream, sustainable and viable source of startup investment in the long-term?
First, let’s understand the landscape of the equity crowdfunding market. Two distinct approaches to equity crowdfunding have emerged since its rise in popularity – Entrepreneur led model and the Investor led model.
The first platforms to hit the market were those that allowed the companies raising finance to solely dictate the investment terms, borrowing its format from rewards crowdfunding models like Kickstarter. This entrepreneur led model proved favourable amongst companies, which turned enthusiasm for their brand into cash for their business and, in return, offered a slice of equity and some kind of tempting reward. Brewdog is just one example of a company that has exploded in recent years, with the support and backing of its crowd of craft beer enthusiasts.
More recently, however, questions have been asked about the long-term impact of this approach to crowdfunding, with a particular focus on overinflated valuations, unclear investment materials and less favourable investment terms for smaller investors. Some are of the view that to rely on consumer enthusiasm for the company’s brand, products or rewards may take the focus away from the actual deal, which may result in a less informed investment.
These platforms must be applauded for re-invigorating the world of startup funding, however, for crowdfunding to be truly sustainable, a more responsible approach must be taken.
The second type of platform to emerge has been the investor or angel-led model. These platforms have lead or institutional investors, who have the necessary experience to perform due diligence on the startup, in order to assess the valuation of the company before going live to online investors. This ensures that online investors are only being exposed to pre-vetted deals. In addition, angel-led platforms give the lead investor an opportunity to negotiate investment terms with the company and emphasise the importance of having proper investment agreements, prior to the startup opening up their raise to the crowd.
These factors provide an opportunity for the less experienced investors to co-invest with professional angels on the same terms, may protect all the investors involved in the round and prepare the company for the future, by keeping things simple when it comes to taking on larger investment from venture capitalists.
Lead investors can also take up an invaluable role, by getting involved in the company. Sometimes, this can even be seen to be more valuable than the actual investment itself. They utilise their expertise and contacts to raise the business they have invested in, onto the next level and the culmination of all of the above is why over 90% of Angels Den funded deals are still trading.
Equity crowdfunding can be seen to be at crossroads, and for it to truly have its place as a mainstream source of funding, long-termism and sustainability must be emphasised. With worries of lofty valuations, poor investment terms and unrealistic forecasts surrounding crowdfunding, the industry must reflect, listen and evolve. Every year, the equity crowdfunding market doubles in size and holds the crown as the fastest growing sector in alternative finance, but as the market matures, so must the platforms.
Crowdfunding, therefore, must become smart and this entails refocusing attention back onto the investor.