A Look Back at 2012 and Five Trends We May See in Equity Crowdfunding in 2013

By Tim Sullivan, CEO and Principal of MicroVentures

The young must shout if they want to be heard above the crowd, or do they? The term “Crowdfunding,” has become 2012’s clichéd, yet poorly defined, term for entrepreneurs to obtain “easy” startup capital from angel investors.

Since the passing of the JOBS Act in April this year, we have seen a gold rush of companies leap into the Crowdfunding space. Nearly $3 billion has been raised through Crowdfunding worldwide in 2012 to help fund everything from startups to film and music projects and even significant donations for non-profits and charities, according to research firm Massolution.

It has also caught the eye of the mainstream press as an efficient capital raising solution for startups to grow with backing from Sand Hill Road to Main Street. TIME Magazine reported in August, “Crowdfunding Could Be the Boost Your Startup Needs.”

Is equity Crowdfunding even legal? The SEC has yet to set rules allowing non-accredited investors to invest in private startups via broker-dealers or funding portals. With the passing of the JOBS Act, Congress in essence voted to enact legislation to promote job growth and stimulation of the economy.  However, until the SEC completes their work, the hopes and dreams of the majority of “Crowdfunding” platforms will continue to be on permanent standby.

As we patiently wait for the SEC to set final rules, here are five trends we may see in equity Crowdfunding in 2013:

1. Differentiation: Platforms that cannot differentiate themselves from angel investors and VCs will be forced to merge or go out of business, due to a lack of deal flow. What drives real deal flow is the participation of institutional investors at the same terms as individual investors while not detracting from the value provided by angels and VCs.
2. Due Diligence: Every platform will begin claiming they do some sort of due diligence on the startups they introduce to investors. While the SEC may require additional disclosure requirements, practical speaking, the legal ramifications for those that do not perform adequate diligence are likely to be extremely consequential.
3. Broker-Dealer Registration: The JOBS Act may require platforms to register with FINRA as broker-dealers. Many will simply partner with a broker-dealer since becoming one is both a challenging, expensive, and a quite lengthy process.
4. Private Equity: More platforms will likely look like private equity funds, pooling investor capital into a fund. It will be a money manager’s responsibility to invest that capital into multiple startups on the investors’ behalf.
5. Growth: Platforms that understand and offer professional experience, personal service, regulated activities as a broker-dealer and formal due diligence will continue to expand at a near 100 percent growth rate and consume market share from less sophisticated platforms. 

Equity Crowdfunding is still in its infancy, similar to the Dot-Com era back in 1995 with the Netscape IPO. Ironically, the traditional term Crowdfunding was supposedly coined around the same time in 1996 by Michael Sullivan (no relation) who was looking for a way to help fund independent video creators online.

It is estimated that there are currently more than 500 active Crowdfunding sites worldwide, a third dedicated to helping raise capital for startups. Crowdfunding is trumpeted as the new hope for startups to find the capital they desperately need to become vibrant small companies, which in turn will drive job creation and ultimately grow the economy, exactly why the JOBS Act was originally passed by Congress.

While Crowdfunding has exploded in 2012 it has yet hit its tipping point. Compared to Dot-Com investing in 1999, where there was extreme investor demand for more than 450 IPOs in the United States alone [1], Crowdfunding is still in the early innings. In my opinion, we won’t see this type of investor demand for Crowdfunding startups any time soon. Before it hits a peak, there will be multiple iterations of what is really behind the Crowdfunding term – investing in early stage startups.