Crowdfunding is not here to replace venture capital but syndicate it

Crowdfunding has moved on from being derided as a weakness by venture capital firms to instead becoming an emblem of confidence, according to Equityfor CEO Derek Weber in a research interview with FinTech Global.

Weber believes crowdfunding will be bigger than venture capital by 2020, with the former gaining huge traction as part of the financing sector. Eclipsing VC in terms of size does not mean the end of the venture capital model, however, but rather a shift towards sparking more partnerships between the platforms. “We’re not doing it better than the VC, we’re including and syndicating with the VC,” Weber said.

He added, “Venture capital firms understand that if a company goes through an equity crowdfunding round it is likely that they have been seriously vetted, internally and externally, they’ve gone through the process, they’ve had all their materials ironed out, they’ve had VDR’s setup with their fundamentals and reviewed, and they’ve gotten market traction from investors that are typically difficult to energise. 

“So, by the time it reaches a VC firm, it used to be a case that crowdfunding was seen as a weakness of a company, an inability to gain traction in a market by going through standard institutional sources; however, that is fundamentally changing. In fact, venture capital firms believe, that it’s a huge benefit to have done it and it is an emblem of the confidence investors have in that company.”

Despite the rise in crowdfunding, VC investment into the sector itself has fallen over the past two years according to FinTech Global data. The most venture capital investments in to the sector was in 2015, with it reaching $507.1m across 95 deals, but last year saw a significant decline reaching only $287.3m and 2017 looks set to continue this fall in investments. While there is a decline in funding, crowdfunding platforms have been some of the most active investors in the sector. Since 2014, FundersClub and Seedrs  were in the top ten for number of FinTech investments having made 46 and 45 deals, respectively since 2014.

The shift towards crowdfunding is something Weber sees is step in the right direction, as when a venture capital firm invests additional capital its beneficial for them to embrace crowdfunding. An example Weber used was if a venture capital has backed a startup from seed rounds and wishes to re-invest, it’s good for additional options and broadening the pools of equity, which it can get via crowdfunding platforms like Equityfor.

One change Weber sees on the horizon is platforms increasingly raising their own funds for co-investments, as well as venture capital and private equity firms creating funds for this too. A firm might decide to commit a certain total amount of capital into companies in a year via the platforms. This is something Equityfor is already looking to do, with it planning to create a co-investment fund in the future, to work alongside its accelerator and crowdfunding platform.

Diversifying the Series investment rounds

Creating a partnership between the crowdfunding and venture capital firms, might not just be through co-investment funds, but instead reshape the Series investment rounds. Weber believes that the investment round might be split to include different types of investors, rather than just a single group.

Weber said, “Platform to platform relationships are also something that are going to happen. For example, the market is syndicating more and more in the sense that in a $10m raise, perhaps the full raise gets allotted at $2.5m to four platforms as opposed to $10m to one. The rise of specialised platforms focused on particular segments of companies; segments of investors – platforms of all kinds including ones that are venture capital oriented.

Having a financing round like this is gives the companies the ‘best of both worlds’, as it gives the CEO the option to leverage different forms of equity, he said. So, a company might receive capital from strategics, family offices and then a certain number of accredited investors collected under a SPV (special purpose vehicle). This will help create a mix of investor types, passive, semi-passive and very active, which Weber sees as essential because too many strategics can be problematic, but so can too many passives as you don’t get the intelligence from both.

 When will it happen?

According to Weber this is already happening, there are a lot of firms which are exploring the options, of either creating their own funds which are dedicated for investing via a crowdfunding platform, or looking to create partnerships. The reason they are looking into this shift is because they know that crowdfunding is the ‘next wave’ of the market, as there is a chance for higher closes, Weber added.

He said, “One thing that hasn’t happened yet is the really large firms have not allowed their clients or reps to engage in equity investment opportunities, whether it be into an investment fund aimed at capital deployment into issuers on equity platforms or for direct investment in companies… When that dam breaks that becomes the catalyst of change in terms of large firms being able to recommend to their clients making direct or fund investments to equity-crowdfunding platforms and offerings. I think that is coming, it’s a couple years off, we’re seeing it chip away at the family office level, but not yet at the big firm level.”

Copyright © 2017 FinTech Global

Latest Post