By: Chris Tell at http://capitalistexploits.at/ [10]
That's what its being called. Crowdfinance or crowdfunding, is a space we've spoken about repeatedly on this site. Mainstream media have been a little slow to wake up to it, but wake up to it they will.
It is MASSIVELY DISRUPTIVE, and the implications for traditional brokers, investment bankers, venture capitalists and the numerous flow-on and related industries cannot be underestimated.
For the last few years we've watched the crowdfunding space intently and have deep connections in the industry. 2013 landed up being a pivotal year for crowdfinance and 2014 looks even better.
In a regulatory environment that has appeared to be sleepwalking into high-vis misery, the SEC removal of the 80 year ban on general solicitation for private companies was a step in the opposite, yet right direction. Catalytic mainstream acceptance was further solidified, and a number of high profile investments were made. Google led a $125 million deal buying a stake in Lending Club, valuing the world's largest p2p lending platform at $1.55 billion. Blackrock came in as a strategic investor to Prosper, to name but two.
Our friend Dara Albright, Co-founder of NowStreet Wire, has 4 predictions for 2014. Incidentally we don't disagree.
1. CAPITAL WILL BE REALLOCATED FROM TRADITIONAL FIXED INCOME PRODUCTS INTO PEER-TO-PEER (P2P) LOANS
2013 was an extraordinary year for p2p lending. The domestic market grew 177%, the global market exceeded $8B, and the industry began winning over an initially skeptical media. As the financial press increasingly draws attention to p2p’s greater and more stable returns, we should experience an exodus from bond funds into p2p. This past year, many active bond managers underperformed their benchmarks, and investors began withdrawing money from bond funds at record paces. According to Lipper US Fund Flows data, over $60B has been pulled from municipal bond funds alone in 2013 – the most since 1992. With p2p garnering mainstream attention, conventional fixed income asset classes languishing, and wealth managers becoming more knowledgeable about p2p investing, more capital is likely to find its way into a diversified portfolio of p2p loans.
2. EQUITIES CROWDFINANCE WILL GERMINATE THROUGH SELL SIDE CHANNELS
Whereas p2p lending sprouted from the yield-hungry investing public before being chased by the institutional buy-side, the equity side of crowdfinance is more likely to germinate through sell-side channels such as boutique investment banks and small cap underwriters who possess decades of experience selling “story stocks”. In 2014 brokerage firms will quickly discover additional revenue streams emanating from corporate crowdfinance products such as PIPRs (“Private Issuers Publicly Raising) and crowdfinanced IPOs. Instead of leaving money on the table, BD’s will embrace these new products that not only contain more attractive commission structures, but mitigated compliance risk.
3. OTHER CROWDFINANCE STRUCTURES WILL PROVE MORE VIABLE THAN TITLE III CROWDFUNDING.
Despite what most crowdfunding enthusiasts would like to believe, Title III Crowdfunding, as proposed by the SEC, will not be the holy grail of capital formation. There are more feasible and cost-effective options available to issuers such as PIPRs, intrastate crowdfunding and even rewards-based crowdfunding. Title III Crowdfunding will likely undergo a number of legislative iterations, such as increasing the $1M offering threshold, before it becomes practicable for most emerging businesses. While national securities-based crowdfunding remains in flux, “locavesting” or intrastate crowdfunding will be a better way for most regional businesses to raise funds. As more states follow Georgia and Kansas in bypassing the SEC and implementing their own crowdfund legislation, more businesses will have an opportunity to reach out to their community for growth capital.4. VENTURE CAPITAL WILL CHASE CROWDFINANCE INFRASTRUCTURE PLAYS
Venture capitalists, looking for ways to capitalize on crowdfinance, will recognize that a vast amount of wealth will be generated in infrastructure plays. In 2014, venture capital will flow into those companies that provide settlement & clearing functionality, supply market data to the global investing community, and facilitate secondary transactions of crowdfinanced offerings and p2p debt.Finally, it must be asserted, that no nation has ever succeeded, or will ever succeed, by printing or taxing its way to prosperity. Nor can a nation stimulate its economy by restricting its middle class investors and entrepreneurs from accessing portfolio yield and growth capital. However, employing the doctrines of crowdfinance – granting all citizens the ability to freely invest in the ingenuity and invention of fellow citizens – has proven to be a winning formula. In fact, it is what enabled a simple farmland to become a global innovation leader and the greatest economic superpower in the history of the world. And it is crowdfinance that what will fund the innovation that will fuel the next economic boom. As the crowdfinance industry crosses these new milestones in 2014, it will be paving the way for new medical cures, technological advancement and greater wealth equality.
It is this last prediction which we're seeing happen already and we absolutely, 110% wholeheartedly agree.
The early signs are evident. We have a dedicated staff member who's job is to provide us with a weekly data dump of all that is new in the world of crowdfunding, p2p, etc... Naturally, out of this we hear about a lot of "experts" popping up. Bloggers who clearly know close to nothing about private equity, and nothing about investing in-fact, entering the space touting how you too can make millions in private equity. Yes, you too can become obscenely rich investing in the next Google. Let the games begin. A bubble here we come.
I think we are still a ways off the sector really gathering momentum. To front run this inevitable bubble, Mark and I, together with our CPAN members, [11] have just made our first investment in this space. It's an infrastructure play, per Dara's 4th prediction above.
I think 2014 will be a banner year for equity crowdfunding and push us further towards bubblicous territory, which will likely peak in a few years time. Just a guess. An educated one, but a guess nonetheless.
I'll add another couple of predictions to the pot.
- We'll see a new version/s of "Shark Tank";
- Much like co-ops in the third world aggregate community projects, I can envision local communities crowdfunding social projects such as playgrounds, theaters and even community gardens.
Let us know what you think in the comments section [12]. We'd love your feedback!
- Chris
"Venture capital is a bad business" - Fred Wilson (well known venture capitalist and partner at Union Square Ventures)