Crowdfunding in the Investment Mainstream

As I watch the crowdfunding industry play out, I am reminded of an old Bruce Lee quote about water slowing as it makes its way through cracks.  Technology has a sneaky way of seeping into new industries and simplifying what were once dull and monotonous processes, making them lean and streamlined, thus reducing costs and improving services. The equity crowdfunding industry has evolved over the course of the last four years, since the passage of the JOBS Act, but those looking to take advantage of the new laws have only recently had the benefit of all of the legal framework. Software has come a long way since the early years, and I expect things to continue to evolve as the years wear on.

In the early days of the Internet, shopping carts were cumbersome to implement. E-commerce was new, and consumers were worried about security concerns and whether or not it was safe to transact business online. Such is the case today with equity crowdfunding. Investors are not used to purchasing equities online, and platform intermediaries are needed to educate, underwrite and play go-between.

As time wears on and technology drives down the barriers for new entrants, I think you’ll see more and more issuers bypassing intermediaries altogether in favor of working directly with the crowd.  There will still be a role to play for marketplaces, but the stronger issuers with brand awareness do not wish to have their capital formation and relationship with investors intermediated by platform operators.  Marketing agencies are already providing quality services for issuers to grow the size and scope of their list, and I expect these services to become more efficient and allow issuers to reach their target audiences less expensively as time wears on. Capital will be raised more efficiently with lower transaction costs, which will leave more of the value chain to be consumed by investors or issuers relative to their bargaining power in the trade.

The securities industry is quite complicated, which has provided a nice moat for many years. Expect technology to disrupt the current platform disruptors as time passes. Expect investors to become more comfortable with private offerings online and greater adoption by issuers. A decade from now, the technology is likely to be no more revolutionary than e-commerce shopping carts are today.