Institutional Investor Involvement in Equity CrowdFunding Portals

Written by Brian ThopseyPublished in
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London SkyscraperEquity funding portals in the United States have begun to attract the attention of institutional investors with their involvement in the industry poised to grow. According to University of Cambridge & Chicago Booth School with KPMG & CME Group, 27% of equity crowdfunding is coming from institutional investors from 2013 to 2015. This is a much smaller percentage compared to other alternative financial sectors that are more mature. Massolution figures show that crowdfunding as a whole has already grown to over $30 billion in 2015 with $2.5 Billion in equity funding portals while the two universities state $590 million was raised in equity portals in the United States. Several recently released reports help to shed some light on what the large institutions think about the burgeoning sector and where they think it may be headed.

US Proportion of Total Funding by Institutional Investors by Alternative Finance Model (2013–2015)

Wall Street

Several former big players on Wall Street have have left their posts to focus on Fintech investments. Included among the old guard that have a newfound interest in the financial technology sector are former Citigoup CEO Vikram Pandit, and John Mack, the former CEO of Morgan Stanley. Both of the former Wall Street heads have made substantial investments in the sector, which points us to the potential that the emerging industry presents.

Vikram Pandit invested in TransferWise, the cross-border payments company,  CommonBond, an online provider of student loans, and PeerIQ the credit risk assesment firm. He was among a group of investors, including former Goldman Sachs co-president Jon Winkelried, who put $2.7m into Orchard, a data and infrastructure provider for the marketplace lending sector. He also invested in MMKT Exchange, which is developing technology to improve liquidity in the secondary market for loans. He is now investing through the Atairos Group and The Orogen Group, independent private companies focused on supporting growth-oriented businesses. Atairos was launched in 2016 with more than $4 billion in committed capital. John Mack has invested and is on the board of LendingClub which he owns 2.4 million shares of and took part in a $10M funding round for credit rating startup New England Funding Technologes (NEFT). He is also an investor in Orchard along side Pandit. He invested in Dataminr, which analyses social media to create alerts for traders.

Top Venture Capital Firms

AngelList Syndicates are attracting top tier venture capital firms Sequioa (Lifx), Andreessen Horowitz (uBiome), Khosla Ventures (OpenDoor), Accel Partners (Gametime). These firms are qualified as top firms according to CBInsights report of General Partners ranking one another. Syndicates employ a market design feature that divides labor among participants. Lead investors conduct due diligence and monitor progress on behalf of those backing the syndicate. The lead investors and entrepreneuers endure  reputation and financial penalties for poor performance and enjoy rewards for positive performance. As Christian Cailini of MIT states, this aligns the incentives of leads, backers and entrepreneurs in a manner that directly addresses information asymmetry problems.

Correlations to Lending

Survey of Marketplace LendingThe marketplace lending industry is several steps ahead of the equity funding portal market which may provide a look into what is ahead. Richards Kibbe & Orbe LLP and Wharton FinTech have released their 2016 Survey of US Marketplace Lending, which surveyed more than 300 institutional investors. More than 80% of those surveyed believe that a bright future lies ahead. Marketplace lending challenges the traditional bank lending model by connecting borrowers and lenders directly over Internet-based platforms. Those surveyed expressed some concern about the future of the regulatory environment, and a good majority of respondents believe that a round of consolidation is likely on the horizon. "The unchecked optimism toward this industry, combined with the fact that it is still maturing, makes it an interesting one to watch, particularly for institutional investors that sense opportunity," said FinTech President Uday Seth. As institutional investor involvement increases in this industry that is more mature than equity funding through portals we can see some of the same trends playing out in the near future.

Enterprise

In the past year, several large global businesses have begun leveraging the crowdfunding model for new ideas and projects, and have gained some valuable insight in the process. What better way to determine the potential merits of a new gadget than taking the temperature of investors that will also make up the marketplace? Indiegogo launched a crowdsourcing platform for corporations earlier this year. The company's Enterprise Crowdfunding service allows the company to collect public funding for research and development projects that may otherwise get lost in the shuffle of corporate red tape. Danae Ringlemann, co-founder of Indiegogo, touched on a number of topics, including her vision of what equity crowdfunding may become. "Responsible investing or socially motivated investing is the most powerful way to invest. Perhaps the main type of way to invest in the future. Profit-only investing will become a subservient one," Danae told Crowdfund Insider.   

Several large companies have followed the lead and opened up their own internal platforms to spur internal investment in corporate initiatives. Sony has launched its own site to sift through the best ideas and products from the company's own employees, while artisan marketplace Etsy has launched a pilot program known as Fund on Etsy, which will provide an outlet for creative types to fund the creation of new products and to ultimately grow their businesses.

Retail and Non Accredited Investors Learn from Professionals

Previously, accredited and institutional investors had the pick of the litter when it came to investing in the next big thing, while those that were not wealthy enough were forced to sit on the sidelines and wait for an IPO. With new rules, individuals can invest in equity and debt in startup companies at their earliest stages. Title III of the Jobs Act recently came into effect, and with that comes the removal of the handcuffs from individual retail unaccredited investors. While we may point to a prevailing sense of opportunity among those posed to invest a recent post on the Forbes website outlined some of the concerns with inexperienced investor involvement and this change. Institutional investors have some concerns about the future of the regulatory environment and the risks associated.

AOL co-founder Steve Case recently sat down with Fox News and shared some of his thoughts on the future for entrepreneurs and the equity crowdfunding phenomenon. Case told Fox News that "we're beginning to see the benefits of crowdfunding as a means of leveling the playing field, so anybody with any idea, irrespective of where they are, have more of a shot. The seed capital to get started will increasingly come from these crowdfunding platforms, and then as entrepreneurs achieve some momentum, they can more readily connect with institutional investors to get expansion capital."


Sifting through offerings and information available in this alternative financial technology market can be time consuming, and sometimes leave you walking away even more confused. At FundWisdom we make it easy to examine the various platforms, costs, trends, and navigate the associated risks in financial technology for the digital equity funding market. 

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