In the weeks following the release of the final Title III Equity Crowdfunding rules, there has been much debate surrounding the viability and demand for true equity crowdfunding. Critics have argued that the wide availability of traditional venture capital will dissuade companies from adopting equity crowdfunding. Dissenters further argue that inexperienced crowdfunding investors will lose thousands investing in unfit companies, forever painting equity crowdfunding as an illegitimate investment opportunity and source of capital. Yet, the theories and conjectures of critics are merely that - theories and conjectures. When you take a step back and look at actual data from the real world, the potential for Title III looks much brighter. However, despite the immense potential, there is plenty that could still go wrong if the industry doesn't manage the opportunity properly.
A quick look at the headlines would lead you to believe that securing venture capital funding has been a crucial step in the lifecycle of every single company. Make no mistake, venture capital is the undisputed best avenue for any technology company with considerable, proven traction that is looking to build a billion dollar businesses. However, for the vast majority of startups and small businesses which produce 50% of GDP and 2/3 of the nation's private sector employment, venture capital will never enter the equation. In fact, for every startup which received venture capital there are 300 entrepreneurs which raised capital from friends and family and 450 entrepreneurs which funded their companies through personal savings and credit cards. Furthermore, even promising tech companies typically don't tap venture capital for their first round of capital.
So for the vast majority of new businesses which rely on their friends, family, savings, and credit cards to get started and to grow, Title III offers a new streamlined process to quickly and efficiently fundraise. In addition to obtaining capital, companies stand to gain other proven benefits. According to Bain & Company, investors in the public markets spend 54% more at companies in which they are invested and are two times more likely to recommend those companies to their network. For startups and small business, where the relationship between a company and its users is often closer than that of publicly traded companies, inviting their customers to become investors will prove a powerful tool to increase loyalty, engagement and virality.
People who are not as familiar with equity crowdfunding typically ask how it's different than Kickstarter. Kickstarter is a phenomenal platform which has facilitated over $1.5 billion since 2009. But with Kickstarter, backers get a reward like a watch, t-shirt or their name in the credits of a movie. They cannot receive equity or any potential return. Furthermore, although there have certainly been some huge success stories, the average raise on Kickstarter has been $7,825. In contrast, the average raise on SeedInvest, where investors can get a piece of the company, has been $500,000 over the past three years. Put simply, Kickstarter is for funding ideas and equity crowdfunding is for funding businesses.
There is another common debate about whether smaller investors will actually move the needle once they are able to legally invest. We recently polled 18,000 non-accredited investors on SeedInvest about the upcoming opportunity to invest in small businesses and startups and the data suggests that smaller investors will matter. In our survey, 68% stated they were likely to invest in a startup when the new regulations went into effect, 89% expected to invest in multiple startup companies per year and 75% said they expect to invest at least $1,000 per company.
Furthermore, we've recently enabled companies to reach out to their customers to express interest in investing (part of the recently passed Title IV of the JOBS Act) and 8,000 people have expressed $34 million of investment interest with 75% being smaller investors. Clearly there is legitimate pent-up demand. On a related note, equity crowdfunding has actually been legal in the UK for the past 4 years and over 2,000 companies have raised over 175 million with zero cases of fraud. It's been working so well that the UK government has started investing through crowdfunding platforms to support job growth and GDP.
The potential economic impact of equity crowdfunding is significant. The global equity crowdfunding market has grown from $400 million in 2013, to $1.1 billion in 2014, and $2.6 billion in 2015 (estimated). Moreover, according to a recent Goldman Sachs report, the immediate addressable market opportunity of crowdfunding is $1.2 trillion, larger than the opportunity for payments (Square and LevelUp), small business lending (OnDeck and Kabbage), student lending (SoFi and CommonBond) and consumer lending (Prosper and LendingClub) combined. The potential for Title III equity crowdfunding looks much better when you look at the numbers.
Although Title III has significant potential, there is a lot that could go wrong. It will be up to platforms themselves (ie. "The Gatekeepers") to ensure that they don't screw-up the opportunity. First, platforms out there which merely act as listing services could increase the likelihood of fraud and failure which is problematic in the medium-to-long-term. Selling securities is not the same as selling a couch on Craigslist and they should be handled very differently. Second, investor education will be critical given that investing in private companies is dramatically different than investing in public stocks. Platforms must ensure investors know upfront that private companies are risky, that you must diversify, that there will be little or no liquidity and that you should only allocate a small percentage of your overall portfolio to early-stage companies. If platforms fail to do this there will be lots of unhappy investors. The opportunity is real, but so is the risk if the industry doesn't handle it prudently.