VC vs. Crowdfunding: competitors to partners

Equity crowdfunding and Venture Capitalism are often pegged against each other as fierce competitors within the equity funding space. Equity crowdfunding is labelled as the cool, new kid on the block fighting to dismantle the age-old institution of VC but the relationship between these two funding vehicles is a lot more complicated. To understand where we are now, we need to go back ten years to the start of crowdfunding in this space.

David and Goliath: Equity crowdfunding enters the scene

Equity crowdfunding as we know it dates back to about 2009 with early platforms such as Crowdcube and Seedrs starting to host regular deals from about 2011. At this early stage, the general perception was that equity crowdfunding was for those that couldn’t get funding elsewhere, the deal numbers were relatively low and I’m not sure many in VC considered equity crowdfunding a serious competitor.

Several years later, it became clear that equity crowdfunding wasn’t going away. In 2015, the equity crowdfunding industry had grown by 295% and now represented about 15% of the UK seed and venture stage equity investment market. Then in 2015 the SEC (in the US) amended the Jumpstart Our Businesses Act (JOBS Act) to make equity crowdfunding a regulated activity in the US. At this point, the lines between VC and equity crowdfunding really started to blur - with platforms forming partnerships with institutions, accelerators, incubators and VC firms directly.

As equity crowdfunding became more competitive, platforms began to require more “pre-committed investment” be brought to the platform by companies considering a crowd raise. It was now very rare that companies could conduct a full raise from the crowd with angels and VCs leading crowdfunding rounds.

Partners: VCs as issuers

First, we started to see equity crowdfunding pitches from “cofunders” and accelerators. For example, Nova, a Liverpool-based company that offers mentorship and investment for startups, have now used both Crowdcube and Seedrs. Nova is therefore using equity crowdfunding to support other startups as part of what is known as a “cofunding” model. Or Sustainable Accelerator, who ran multiple equity crowdfunding rounds to fund their activities in investing in, mentoring and helping startups get to market. These were the first examples of equity crowdfunding funding the “layer above” startups by funding companies that themselves invest in and support startups.

Recent events further advanced the relationship between VC and equity crowdfunding. In December 2020 Backstage Capital, a US-based VC investing in underserved founders, launched an equity crowdfunding site called Republic to raise their next fund. In doing so, they’ve allowed retail investors to participate in VC investment, in the same way LPs are able to but with significantly smaller ticket sizes - from $100. Backstage Capital broke records in the US, becoming the fastest equity crowdfunding issuer to raise $1m. They then became one of the first to raise $5m when new regulation was introduced by the SEC.

Finally, Passion Capital in March 2021 raised part of their latest fund on Seedrs, becoming the first VC fund in Europe to use equity crowdfunding in this way. As with Backstage Capital, this allows retail investors, through them, to get access to other investment opportunities that otherwise would be inaccessible. Passion Capital has invested in the likes of Monzo, Tide and Thread and now retail investors can potentially benefit from similar high-profile investments through Passion Capital.

Competition back on the menu?

These recent cases of VC firms as crowdfunding issuers represent VCs response to the increasing power and autonomy of retail investors. Retail trading has boomed in recent years and with many high profile B2C IPOs launching in late 2020/early 2021, more retail investors are seeking unprecedented access to early stage private equity deals. By using equity crowdfunding platforms, VCs are able to unlock the power of the crowd and access an increasingly large amount of retail investment during their fundraise.

In the short term, this is a significant positive for equity crowdfunding. VCs as crowdfunding issuers cements the legitimacy of the model and clearly marks VC and equity crowdfunding as partners as opposed to competitors. However, in the long-term, increasing appetite by VC to include retail investors could pose a threat to equity crowdfunding platforms. White-label crowdfunding solutions already exist so if involving retail investor money in VC funds becomes a standard practice it’s unlikely that VCs will continue to use established equity crowdfunding platforms. Instead, we may see VCs host crowdfunds on their own website, or dedicated equity crowdfunding platforms exclusively hosting VC funds as opposed to individual companies.

Retail investors may then need to choose between investing directly in companies or investing in diversified and managed VC funds. While the intimacy of investing in individual companies is still likely to appeal to investors, this new potential landscape is likely to fragment retail investment across multiple platforms. This will reduce investment moving through the existing equity crowdfunding platforms - most of which are already struggling to reach profitability.

I’ll end on a positive note. Equity crowdfunding is still a relatively young industry and it's inevitable that we’ll see new iterations and applications of the model that will hopefully see its popularity expand, allowing retail investors to continue to get an early stake in the companies they love. While these first examples of VCs as issuers may eventually result in a significant change in the kind of equity crowdfunding platforms available, this shift is being led by, and for, retail investors.

My hope is that options and access for retail investors continues to grow, with both established equity crowdfunding platforms and VC firms adapting to involve this new wave of interested investors.

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Hannah is watching this shift closely and reporting on changes in the VC and equity crowdfunding relationship via her blog and newsletter. Sign up to learn more here.

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