When will Equity Crowdfunding take flight?

Jul 31, 2014
Vote on Hacker News

18403570_s

Earlier this year I laid out my vision of the Crowdfunding space – Lending-based crowdfunding (Lending Club, Pret d’Union) is getting the lion’s share of the market, while rewards-based crowdfunding (Kickstarter, Indiegogo, KKBB) are taking the lion’s share of the marketing.

Meanwhile, equity crowdfunding platforms have been brewing in various countries – Seedrs in the UK (who expanded into Europe last November), SeedMatch in Germany (who had some regulatory issues initially around shareholder rights in follow-up rounds), and, in France, a variety of services have begun to pop up.

This week, Sowefund announced they’d raised €400K for their equity crowdfunding platform. This comes just months after SmartAngels raised €1 Million for their “AngelList for France,” and other sites like FundMe look to attract startups to their platform to raise funding, subsequently allowing them to get in contact with a verified list of business angels.

Do I really want “The Crowd” to be a shareholder?

There are two schools of thought in the Equity Crowdfunding space, as I mentioned earlier – Curates and Egalitarian. Sites like AngeLlist and OurCrowd fall into the former, vetting investors and, typically, investing themselves either through syndication or through a direct fund. This philosophy allows startups to seek funding outside of their network, or leverage their network in a scalable fashion to reach all potential investors, instead of just those in their time-zone or immediately available to them.

The latter encourages the idea that your early adopters shouldn’t just buy your product, but should own a piece of it. The idea of having 10,000 investors put 100€ into your €1 Million seed round means that your users will, theoretically, be ‘invested’ in your success and will do more (like spreading the word) to encourage it; however, spreading investors too thin means you don’t have any one person you can turn to in times of crisis.

Likely, the viable model is somewhere in the middle, whereby the ‘mass’ syndicate behind people they believe in, similar to how individuals in the US subscribe to Hedge Funds.

They last piece of the puzzle

In order for Equity Crowdfunding Platforms to be successful, future successful startups must raise on their platform. That’s just how funds/platforms work – Kickstarter owes its success to its early successes, as does Indiegogo. For now, I don’t see top startups (that is, startups that could be global successes) raising on these platforms, because they have easier access to ‘better’ capital elsewhere. Perhaps if the equity gap grows in the Seed area, it will become more common, or perhaps tomorrow’s successes are already on these platforms.

“Only time will tell” seems like a cop-out, but it’s fitting, so there.