First, a 2022 recap:
What a wild ride 2022 has been! As if the last 2 two years weren’t enough with battling an unprecedented virus, this year reminded us that the recovery is far from over, and that the residual effects of lockdown will keep us on our toes a while longer. However, despite uncertainty in the markets, the demand for investment opportunities by retail investors continues to grow. Even almost 2two years after the Game Stop short squeeze, retail investors haven’t slowed down their momentum in the markets. In fact, even with all the volatility, retail investors poured $1.3 Billion a day into the stock market in the first half of the year. In that same trend, equity crowdfunding has skyrocketed. While the numbers for Q4 are still being tallied, equity crowdfunding across all portals for Q1-Q3 totaled $373 million in funds raised for issuers (private companies selling equity to the crowd).
Systemically, companies realized that there was another pool of capital to leverage — one that didn’t take as much ownership, didn’t ask for board seats, and contributed to building the business in ways that traditional venture capital couldn’t. Culturally, companies learned that their backers could be the same group of people that understood them at their core — those who struggled with the pain points they were solving, who used their products and services, and who were their most loyal customers/advocates/sales reps. These investors weren’t just investing their money;, they were investing their time and their resources, and they were becoming their sales leads, team members, consultants, and anything else they may have needed to scale to the next milestone. What happened in 2022 for the company raising capital, is that equity crowdfunding established itself as a real, reliable, and fruitful that eclipsed what most traditional funds could contribute.
For the non-accredited investor, 2022 demonstrated that the benefits of venture capital were, in fact, accessible, and that it didn’t take entire a life’s savings to do it. It also proved that even a non-professionals could perform quality due diligence on deals, especially if done with community stakeholders. Direct investing became an additional investment option aside from the traditional routesoptions like your 401k’s, mutual funds, IRAs, etc. It became a way to vote with your dollar and potentially benefit from the returns historically reserved for venture capitalists. For example, in 2018, popular equity crowdfunding portal Start Engine launched an equity crowdfunding campaign for their first round. A few short years later and a 3 to 1 split, a $1000 investment into that first round would be worth $10,000 today. Access to high growth companies was now possible through the democratization of venture capital.
What we can look forward to in 2023:
Acknowledging that culture and crowdfunding are co-dependent.
The Game Stop short squeeze of 2021 was fueled by one collective sentiment: — stick it to Wall Street. Many of those retail investors had lived through the 2008 crash, the bail out of the big banks and saw their parents and families loose their life savings. It became a pivotal moment in the life of the Millennial and one that would stick with deep wounds and a collective resentment for centralized banking. You could say that a culture developed out of these events — a shared struggle coupled with an unparalleled knack for organizing via social media. What resulted was collective action fueled by cultural relevancerelevancy that hit deep at the core of each one of those thousands of retail investors. It was culture, and nothing else, that fueled that wild fire. When it comes to the success of equity crowdfunding, deals will need to be social, they will need to be culturally relevant, and they will need to go viral. If I sound like I’m giving a tutorial on how to create content on TikTok, you’re right — that’s how equity crowdfunding marketing will need to be going forward.
Mining non-capital resources from the crowd will be a differentiator.
This upcoming year will also be a time where issuers (companies raising funds via equity crowdfunding), will begin to hyperscale leveraging non-capital resources out of their investor communities. If we peek into the backgrounds of investors from any given crowdfunding campaign, you’ll see a talent pool with industry expertise and, robust networks acting, and who act as an extension of the sales team by advocating for their investment’s products and services to their peers. For example, digital therapeutics companies may find that many of their crowdfunding investors work at organizations who could be potential customers. Creative talent marketplaces may realize that their backers are the creatives themselves — those same users that power their platform. Already, issuers are sourcing talent from their investor base, asking for introductions to key stakeholders, selling directly those investors and their networks, and even raising follow- on rounds from the same group. While traditional venture capital tries to add additional value with in- house business development support, nothing compares to the networks of the hundreds of retail investors ready and willing to jump in and help.
Better access to later stage deals.
As 2023 starts to prove out the equity crowdfunding model at scale, we’ll start to see more later- stage companies (e.g. Series B and C) raising from the crowd along side their traditional Reg D rounds. Why? Because nothing beats having an engaged, bought in, ready to roll up their sleeves community of advocates like your own crowdfunding investors. This is a group that has historically been excluded from participating in venture capital as a wealth building opportunity. They have watched from the sidelines as Silicon Valley venture capitalists raked in rewards of unicorns like Meta, Alphabet, and Amazon and they are hungry for the chance to participate. What will solidify equity crowdfunding as a standard investment practice (much like investing in the stock market), will be equal access to these later stage scale ups as much as access to the early stage startups. Later stage companies harbor less risk but can be difficult to access, while early stage companies harbor more risk but can also provide a greater delta in ROI to the non-accredited investor. Equity crowdfunding addresses both pain points by providing access to hard to reach deals and lowers risk on the individual by distributing it amongst the crowd.
Equity crowdfunding continues to be an exciting and wild space to participate in. No doubt, it will issue in a new dynamic of financing and a new opportunity for communities to support their own entrepreneurs, not to mention the opportunity for more equitable access to capital for many overlooked founders.