Venture capital and angel investing made efficient – crowdfunding is a better mousetrap
by Hector Botero, CrowdFundBeat Sr. Contributing Guest Editor,
Could it be that crowdfunding, venture capital and angel investing can come together and consolidate into a new financial market model. A financial market with wide reaching implications, accessible to a much larger number of companies and startups seeking capital from a much larger audience of investors, not overburdened by over-regulation and democratized globally providing access in emerging markets traditionally starved for capital? A market that substantially changes the traditional venture capital and angel investing way of operating.
In a July 9th article in Forbes, titled The Equity Crowdfunding Dilemma: Public or Private Fundraising? Contributor Chance Barnett points out “that of the 8+ million qualified (accredited) investors in the U.S., only an estimated 3% have ever invested in a private startup”. My guess is it is impossible for anyone seeking investment to find such a large number of potential investors and there is no efficient method for accredited investors to find investment opportunities.
In simple terms, crowdfunding is changing the way those seeking capital can access potential investors while at the same time providing platforms where investors can find and research investment opportunities efficiently. The difference is huge. It is the difference between a “push” and “pull” process for seeking investment and opportunities.
To date the process has been largely “push” meaning it has been up to the company or start up seeking funding to push the opportunity to venture capital and angel investors – a difficult and uncertain process at best. But now with crowdfunding platforms an inexpensive and efficient method that allows investors to “pull” and research opportunities has come about. It is a much more efficient process, providing access to a growing number of investors in a cost effective manner.
It is the difference between solely emailing, networking and private dealing and doing all of this and also being in the front window of a store front where a much larger number of potential investors can find you easily and without costs. It provides investors all the reasons in the world to use crowdfunding to find investment opportunities, since it is a “pull” which means that as an investor you can now chose and pick opportunities based on industry, product or service, geographical location, valuation, management and more. It is simply a much more efficient system overall and that is why crowdfunding will continue to grow and prosper. Crowdfunding is quickly becoming a much more efficient way of deal making both for the seeking investment and investors. It is the proverbial better mousetrap.
And the way I see it is already here. The SEC Regulation A+ legislation allows raises at different levels with caps at $20 million and then up to $50 million – rich enough for some private equity firms. Certainly high for the angel side. According to Massolution’s annual report by 2016 crowdfunding will be a bigger source of funding than venture capital and angel investing with an estimated value of $34 billion in 2015 which is a long way from just a few years ago when in 2010 its estimated valuation was $880 million.
And so this is where it all comes together. Greater efficiencies and growth. The very words bring a smile to the faces of entrepreneurs and investors alike. Add to that proof of concept, legislation, global adoption and a very real demand and by anyone’s measurement we have a winner. Why will venture capital and angel investing come together in crowdfunding? Because it is simply a better mousetrap.
With a venture capital industry that invests an average of $30 billion each year, and angel investing segment that accounts for some $20 billion a year, and crowdfunding which is more than doubling annually across its various types of funding models and estimated to reach $34 billion in 2015, the new alternative finance capital markets is on its way to $100 billion yearly in 2016.
And so why the excitement? In the last 30 days a handful of Chinese billionaires alone lost more than that in the market and compared to trading on the NYSE it’s a drop in the bucket. Impact is the reason for excitement. Wide ranging global impact. When I talk about a potential $100 billion annual market I am talking about hundreds of thousands if not more than a million investments. Possibly much more than a million investments. This is not about three $30 billion dollar mergers – this is a million new sources of employment, a million future public companies, a million new sources of tax revenue.
Earlier I mentioned legislation as one of the proofs of concept. The fact is legislation is being adopted globally to allow crowdfunding faster than any other type of financial market legislation. Much faster than legislation to allow traditional stock exchanges to develop – as someone that has worked globally in the capital markets I can tell you it absolutely astounding the speed at which countries worldwide are adopting crowdfunding. Countries where no stock exchanges have either existed or prospered are moving quickly to adopt legislation adopting crowdfunding. And developed countries with the largest stock exchanges and mature capital markets like the U.S. are not much different – in the absence of legislation from the SEC on certain key parts of crowdfunding, mainly Title III, a majority of states moved and passed intra-state legislation.
And so it would seem to be a perfect storm: make venture capital and angel investing more efficient and cost effective; make fundraising easier reaching a much larger audience providing more choices for funding sources; operate under legislation that keeps the barrier to entry, bureaucracy and costs low; and do this globally.
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