The Next Wave of Financial Innovation
Marc Andreessen’s (~Andreessen Horowitz) famous article, “How software is eating the world,” published in 2011 (Wall Street Journal) is a perfect backdrop for what is transpiring in the financial markets.
“My own theory is that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.”
FinTech is eating the financial markets.” That statement may be an exaggeration compared to the level of disruption in other industries including music (EMI/Pandora), videogames (Nintendo/Zynga), books (Borders/Amazon), entertainment (Blockbuster/Netflix), photography (Kodak/Shutterfly), and recruiting (Korn Ferry/Linkedin), however, technology’s impact on the financial markets is accelerating.
“More and more major businesses and industries are being run on software and delivered as online services—from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.”
One of the most innovative and potentially “disrupting” platforms in FinTech (financial technology) is crowdfunding (raising smaller amounts of capital from a large group of people). Crowdfunding is estimated to reach $10 billion in revenues (2014) doubling from $5 billion in fiscal year 2013. This white paper discusses one of the industry’s rising stars, Equity Crowdfunding, which is estimated to reach $800 million in revenues (8% of total crowdfunding revenues) up from $200 million in 2013 (4% of $5 billion in revenues). One of the primary drivers of this growth rate is a platform referred to by market sponsors as “Investor Syndicates” (AngelList, HealthiosXchange) or “Circles” (CircleUp)
Investor syndicates are online investment (“venture”) funds whereby Lead investors (usually an individual with an established track record of funding companies/company exits) raises capital from the “Crowd,” or “syndicate investors” in return for carry. The advantages for lead syndicate investors includes expanded access to capital leading to heightened investment protections. For syndicate investors, they gain access to premium deal flow, leadership/industry expertise, and syndicate management and oversight.
You might be asking yourself, “equity crowdfunding revenue growth rates are impressive and syndicates look innovative, but why should I care?!” If you are emerging growth companies it means securing capital from the “Crowd” and for investors, access to premium deal flow/attractive annualized returns.
The unfortunate fact is that accredited investors do not have adequate exposure to private equity. Only 8% of the wealthiest investors in the United States have private equity investments in their portfolios and of this, 40% is in venture capital with obtrusive fee structures. This should surprise everyone given alternative assets (private equity) can generate annualized returns of greater than 20%+ and constitute an important source of portfolio diversification (uncorrelated to other major asset classes including stocks, and bonds).
Let’s start exploring why the percentage of alternative asset “ownership” is so small and how equity crowdfunding will increase capital flowing into promising private emerging growth companies.
Companies in every industry need to assume that a software revolution is coming.”
Equity crowdfunding is an ideal platform for increasing capital flows into alternative assets including private equity. As with the disruptive effects of technology innovations in other industries, equity crowdfunding is positioned to lower costs, increase access to premium deal flow, and make it more efficient to invest in alternative investments.
Available financing vehicle performance (as measured by invested capital and growth rates) ranges from superlative (angel groups and friends and family), to stable, (venture capital – “life sciences investing has averaged $1.6 billion per quarter with a standard deviation of $400 million since January 2001” – Source, Bruce Booth), to suboptimal (self-directed IRA’s).
Private emerging growth healthcare companies raise capital from six primary sources: Angel Groups, Super Angels, Broker Dealers and Registered Investment Advisers, Institutional Capital, Self-Directed IRA’s and Opportunistic.
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