There’s something pejorative in this term “crowdfunding”. Essentially, anyone not wealthy enough to be a qualified institutional buyer (QIB) or an accredited investor is “unsophisticated” and thus relegated to financial activities deemed safe for “the crowd”. A crowd that can buy lottery tickets but must be protected from investing in startups, social ventures or climate impact notes. Why? Shouldn’t we all have the opportunity for upside?
It’s become popular to talk about “wealth accumulation” rather than savings, but the label shuts out those whose goal is to put food on the table and pay the bills each month with saving not even a remote possibility. Yet programs targeting poor and low-income households promote debt much more frequently than they encourage and enable “building wealth”. As for the middle class, those would be “unsophisticated investors”. Listed regulated stocks, bonds or mutual funds, but nothing innovative or values-driven. Effectively, the monied capitalist classes control wealth and one of the primary tools for building wealth: capital markets access. What alternative marketplaces have done is break down the investment barriers for “regular people” like you and me. That’s huge! Here are three positive impacts we could see with alternative marketplace growth:
Democratizing Ownership & Opportunity: To go a bit wonky on you all, democratization of wealth building opportunities can be a powerful force for diversity, inclusion and sustainability. It’s tougher for BIPOC founders to raise friends & family rounds in part because friends & family often have little ‘surplus’ cash. Young companies (we call these SGBs in my space “small growing businesses”) in the clean energy value chain have few options, especially if they’re not in a hot VC target sector. The BlocPower climate impact note is a good example of democratizing investing, hitting its USD 1 million target raise with 24 days left to run in a 2-month campaign and reaching 279 investors. That’s an average ticket size of around $3,500. Accessible.
Transparency: Alternative marketplaces can make seed rounds transparent, enabling whatever resources friends, family and angels can gather to attract new investors? Successful fundraising campaigns on alternative market platforms generally receive the largest amount of funding in the first three and last three days of a campaign. A strong “seeding” of the campaign on day one have a promotional effect. When investors looking for new opportunities see that a campaign has “traction”, i.e. early funders, they are more likely to explore and invest.
Flexible terms: There’s a broader potential value in alternative marketplaces, however, has an even greater collective opportunity to shape the terms and conditions of investment. The standard 2/20 fee structure of traditional US venture capital has spilled into impact and early growth investment funds. Yet many recognize the foolish rigidity of applying 2/20 fees to everything regardless of the target market or investment cycle realities. If a venture needs a budget of 2.3% or even 3% to achieve its strategic goals, cramming a 2% management fee down the founder’s throat isn’t the best pathway to sustainability or success., Alternative marketplaces offer a tempting innovation sandbox when it comes to matching investment terms, conditions and fees to the underlying business models.
So, are alternative marketplaces or “regulation crowdfunding” a threat to VC? Maybe. A little bit.
| “When you swim with the sharks, if you set the terms, you don’t get eaten” Samson Williams, President, Board of Directors Crowdfunding Professional Association (CfPA) |
While VC is most likely here to stay, impact investment may well find new avenues for mobilizing early stage capital through alternative marketplaces. More on “alternative marketplaces” in an upcoming post!
Lauren Burnhill, One Planet Ventures LLC
The Money in the Middle 