The alternative finance market demands constant evolution to keep apace (or exceed) traditional means of investment. Recent years have witnessed equity crowdfunding adapt, collaborating with other sectors of the market to improve the game for investors. Having seen an 85% increase in transaction volumes between 2012 and 2015, according to Nesta, and become the second most active funding source in the UK, as well as improved regulation through legislation such as the JOBS Act in the US, equity crowdfunding has actively involved new investor types to corner more of the industry.
Offering to democratise investment, equity crowdfunding gained traction by allowing “mum and dad” investors to have some skin in the investment game. However, this very “democratic” nature ought to allow the full gamut of investor types to join – hence the consolidation of experienced and retail investors via “syndicated investment”. A syndicate is a group of investors, otherwise known as “backers”, brought together by lead investors, “the leads”. Jointly investing in companies as a single unit, the leads, as seasoned investors with access to a wide investment network, allow the backers to benefit from expertise and deal flow as they piggy-back the leads' deals. The leads received a “carried interest” in exchange, meaning a larger portion of the investment’s profit.
Syndicated investment platforms unite the two kinds of investors to an array of investment opportunities, offering industry expertise to retail investors and deal access to their experienced counterparts. In America, the recent implementation of Title III of the JOBS Act, allowing individual retail unaccredited investors to invest in crowdfunding, means these investors have a permanent place alongside experienced backers. AngelList syndicates have begun to attract premier VC firms to their ranks, aligning the incentives of leads and backers to broaden the horizons of the crowdfunding industry. It’s this sort of development that leads the World Bank to estimate the global size of the crowdfunding sector to reach $90bn a year by 2020.
Equity crowdfunding platforms have started to acquire institutional investment, as one study released by the University of Cambridge demonstrated that across 2013-2015, it represented 27% of equity crowdfunding. As institutional investment orchestrates bigger deals within the sector, it allows access to a broader range of deals for all, including those at the higher end of the range.
The broader array of investor types has lead to the proliferation of support industries for alternative finance – equity crowdfunding consultants, specialist legal services and platforms that show all the deals available. As apps develop consistent with the industry’s growth, there are mobile platforms such as Off3r, the mobile tool that aggregates crowdfunding deals, and showcases companies for investors.
Crowdfunding is as open to evolution as any industry, widening access to a diverse array of investor types – recently, this has included pensions. In 2015, the UK announced that the government would no longer require pensioners to exchange their funds for annuity upon reaching retirement. This has allowed the crowdfunding industry to reach out to this mature sector of investors who are delighted to now withdraw the remaining balance without any limitations, subsequent to taking out 25% of their pension pot tax free.
The ability to have a diversified asset portfolio with new crowdfunding investments and the portfolio approach by investing in different campaigns may appeal to this new sector of investors. This, in addition to the tax breaks offered in the UK, means pension funds represent a new freedom for investors which can benefit the crowdfunding industry.
The coexistence of a plethora of different investor types is very raison d’etre of equity crowdfunding. As more platforms allow a broader array of investor types with skin in the crowdfunding game, the industry will continue to democratise finance.
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.