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Investing in private businesses: the democratising effect of crowdfunding

Democratic finance is a term increasingly finding popularity in the traditionally insular finance industry. This is owed, at least in part, to the ascension of the equity crowdfunding industry – it’s now the second most active investor type in the UK, for example.

Democratic finance is a term increasingly finding popularity in the traditionally insular finance industry.  This is owed, at least in part, to the ascension of the equity crowdfunding industry – it’s now the second most active investor type in the UK, for example. By removing traditional barriers to investment for non-accredited, retail investors, equity crowdfunding has opened up transactions and the industry in an unprecedented fashion. Today, Invesdor examines the democratizing effect of crowdfunding, and how investors engage with unlisted companies in 2016.

Donation and rewards-based crowdfunding demonstrated the possibilities of consumers harnessing the internet for tangible results.  Electronic payment systems and efficient market schemes assisted in the initial crowdfunding boom, and whether it’s crowdfunding films, charities or pet projects, it has democratized our goods and services economy for the better.
 

Empowering retail investors

Traditionally, where individuals without a finance background felt an affinity with a product or company, they had no recourse to investment.  Only high-wealth individuals participating in a VC funding or as angel investors could have their stakes in investment, relegating the financial sector to an exclusive pool of individuals. The rise of alternative finance worldwide has indicated that retail investors look to participate more in the economy – the fragility of our global economy demonstrated after the GFC and the proliferation of online investment platforms have facilitated this. 

Now, with improved regulations and knowledge of risks undertaken, investors can participate in the ventures and companies whose products and services they enjoy.  The democratic nature of equity crowdfunding allows an array of investor types to have diversified portfolios, tap into early-stage companies, and support an array of industries.  Whether it’s a social enterprise or innovating company from the tech industry, the democratized finance place leads to a democratized economy, with companies endorsed by the 99%.  It’s not a matter of where you live, or who your business partners are – in countries with advanced or bespoke equity crowdfunding legislation, access to startup companies is unencumbered and ubiquitous. 
 

New demands for regulation

As the next phase in funding of SMEs, the industry has experienced a doubling in size year-on-year from $15 billion worldwide in 2014 to $32 billion worldwide in 2015 according to a report by Massolution.  This demands regulation to keep apace with the burgeoning sector, in such a way that requirements are not so burdensome as to deter companies from using platforms, and not so light as to put investors at risk. The US has recently implemented the JOBS Act which has sought to boost the equity crowdfunding regime, beaten to the punch by bespoke and liberal arrangements existent across Malaysia, and New Zealand. 

“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.” Paige Craig, founder of Arena Ventures.

As in any democracy, there is a diverse array of individuals engaging within the process. Hence, the co-existence of VCs and angel investors alongside retail investors within equity crowdfunding raises. This cohesion helps the latter to piggyback of the nous and expertise of the former, while the former acquires market validation and diversification.  VCs and Equity Crowdfunding increasingly coexist, as was demonstrated by Invesdor’s previous post, which is good news for the continued merging of previously segregated investor types.   

With equity crowdfunding experiencing a boon in worldwide regulation and a proliferation of various platforms, its impact as a democratic means of investment is truly being felt.  As online investment platforms continue to take hold, we will witness the merits of this democratic system, governed by market validation and unrestricted investment, rather than by transaction history or the size of your bank account.

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Richard Andrée Wiltens

Written by Richard Andrée Wiltens

Richard Andrée Wiltens is a commentator within the fintech sector, who has written for an array of international investment platforms. His career has spanned from investment banking to financial technology firms, backed by an education in economics and finance.