The Value Chain of Crowdfunding and VCs

The increased prominence of equity crowdfunding as a preferred means of alternative finance has been bolstered by worldwide government regulation and an array of success stories. As traditional investment channels face heated competition from the equity crowdfunding domain, the question of where the venture capital market stands is ever relevant. As crowdfunding exits and syndicated investment announce a new horizon for the industry, misplaced scepticism from VC prognosticators has been set aside as VC and crowdfunding have started to consolidate.

The increased prominence of equity crowdfunding as a preferred means of alternative finance has been bolstered by worldwide government regulation and an array of success stories.  As traditional investment channels face heated competition from the equity crowdfunding domain, the question of where the venture capital market stands is ever relevant.  As crowdfunding exits and syndicated investment announce a new horizon for the industry, misplaced scepticism from VC prognosticators has been set aside as VC and crowdfunding have started to consolidate.


The Competition Between Equity Crowdfunding and Venture Capital

Looking at the figures, 2015 tracked a record year for growth within the equity crowdfunding sector. In the Netherlands, the sector witnessed a doubling in growth to from 63 million in 2014 to 128 million last year. Worldwide, it has surpassed venture capital as the preferred avenue for funding, with equity crowdfunding and venture capital raising 34 billion and 30 billion respectively, according to a global report by Massolution.  The near parity of popularity between these two funding channels has forced VC firms to readjust and reconfigure their strategy in relation to how they can not only coexist but also combine to achieve further success. But just how are the two beginning to consolidate their growth?


Consolidation between Venture Capital and Equity Crowdfunding

The essential benefits of selecting equity crowdfunding or venture capital as a means of raising funds are starkly different – the latter offers strategy and experience from its backers, in contrast with the public element and ambassadorial appeal offered by the former.  The soaring success of the crowdfunding sector in 2015 has quashed the key concerns from the venture capital industry, who prematurely rejected the notion that broad shareholder bases were governable and that legislation would struggle to keep apace with the burgeoning industry.  

The risks posed by raising funds through the crowd as opposed to the advice of a venture capital firm are offset through the democratic validation of ideas that occurs in the crowdfunding process, offering large amounts of feedback from investors. The traditional argument that a broad base of shareholders is an ungovernable proposition has been largely negated, as they are manageable under correct management and function as an incredible effective marketing resource for the business.
 

Going Forward

As we witness the rise of institutional investment, crowdfunding exits and the proliferation of crowdfunding platforms worldwide, the democratization of the digital marketplace is assured.  The public is able to become actively involved again in exciting products and concepts, incentivizing a new regime of investors, and validating game-changing new startups that hitherto would not have had a platform for their success. 

Startups funded by venture capital have a 75% failure rate at present, and it’s testament to the power of equity crowdfunding that the equivalent rate within the industry is much lower at 20%. However, it should be noted that this gap may narrow as these companies mature. Additionally, the appeal of efficient, more easily obtainable deal flow has captured the attention of VCs. Crowdfunding platforms build deal flow organically, saving the time and resources traditionally required to screen new companies, becoming an all-in-one deal flow tool in itself. 


How does Syndicated Investment work?

Like institutional investment before it, syndicated investment is an exciting new development within the crowdfunding sphere that permits large groups of investors to invest as a single unit. Investors new to the game work alongside their experienced counterparts to form a syndicate, forfeiting share options or committing to other compromises in exchange for the guidance of their expertise and deal flow. The improved access to deals for mum and dad investors, who have been able to discover and harness a wealth of new startups, is now partnered with the ability to access the guidance and industry expertise of accredited investors too, who are known as leads.

A partnership between venture capital and equity crowdfunding mirrors the evolution both industries have had to effect to remain competitive.  A new model which permits both accredited and inexperienced investors to partner in order to harness an entirely new and game-changing framework of companies is in keeping with the democratic nature of equity crowdfunding.  

 

Guest blogger
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.