Crowdfunding Industry Overtakes Venture Capital and Angel Investing
By 2016 the crowdfunding industry is on track to account for more funding than venture capital, according to research firm Massolution's annual report. With an estimated market value of $34 billion in 2015, crowdfunding has come a long way since its valuation of $880 million in 2010. In comparison, the VC industry invests an average of $30 billion each year. Meanwhile the crowdfunding industry is doubling or more, every year, and is spread across several types of funding models including rewards, donation, equity, and debt/lending. In particlar, equity crowdfunding - now being legalised in the US - holds huge disruptive potential.
The crowdfunfing market grew by 167% in 2014, continuing the exponential growth of previous years. Two months ago the thriving British FinTech (financial technology) sector witnessed its first billion-dollar business. The company? Funding Circle, a five year-old crowdfunding platform. Their $150 million funding round was over-subscribed.
It should come as no surprise that a crowdfunder is the first business in the booming world of FinTech to break through the billion-dollar mark. Small businesses are finding it harder than ever to raise money from traditional sources. Quite simply, banks don't seem up to the task. New bank loans to small businesses in Europe plummeted by 35% between 2008 and 2013. Meanwhile, crowdfunding platforms are enjoying huge support from policymakers in the form of tax breaks, and from institutional investors looking to diversify their portfolios.
Crowdfunding is moving mainstream. So, what does this mean for older, more established types of business financing?
Venture capital overtaken
The World Bank estimated that crowdfunding would reach $90 billion by 2020. If the current trend of doubling year over year continues, we’ll see $90 billion by 2017.
VC funding, a well-travelled avenue for small businesses trying to raise capital, accounts for roughly $30 billion a year. Angel investing, meanwhile, accounts for roughly $20 billion a year. In short, the crowdfunding industry is scaling up rapidly with VC and angel investing firmly in its crosshairs.
Interestingly, the crowdfunding sector with the most potential for disruption is yet to truly take off. If, as expected, equity crowdfunding doubles in size annually over the next few years, it will overtake venture capital as the largest source of startup funding by 2020 ($36 billion). Equity crowdfunding in Europe has been flourishing for several years, while the US - the birthplace of crowdfunding generally - has been slow in legislating for its introduction.
Currently the US equity crowdfunding market is limited to accredited (professional) investors only. But what happens when an entirely new class of investors - namely 250 million Americans - are empowered to participate and invest for the first time under new equity crowdfunding laws? In theory this would more than double the current European-dominated equity crowdfunding market.
The potential growth and impact is staggering.
How will angels & VCs respond to equity crowdfunding?
What will the market for startup investing and small business finance look like as equity crowdfunding continues to grow? And are VCs embracing the changes?
It's fair to say that crowdfunding was originally looked down upon by professional investors. Some angels and VCs have begun integrating equity crowdfunding as a step in their investment strategy. Increasingly we're seeing startups in talks with bigger investors after a successful crowdfunding campaign, as fund managers scout platforms for interesting ideas.
— Symbid (@Symbid) July 8, 2015
The lines are being blurred across the early stage investment ecosystem – some equity crowdfunding platforms are effectively becoming venture funds of their own. Meanwhile, VCs are integrating equity crowdfunding into their investment processes due to the marketing and strategic benefits it can bring.
What's for sure is that the real winners are the high-growth entrepreneurs who have more sources and channels for finding capital than ever.
A giant new capital market is taking shape before our eyes.
Are you interested in learning more about investing via crowdfunding? Read our advice on how to build your portfolio here.
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