Equity Crowdfunding’s Pitch to Democratize the Markets

In the wake of the ’07/’08 Great Recession, the markets for growth capital deteriorated as venture capitalists and institutional investors rushed to avoid excess risk at all costs. As a result, crowdfunding platforms like Indiegogo and Kickstarter rapidly emerged to fill the funding gap, allowing the general public to fund creative businesses in exchange for early product samples. 

As the most significant economic event since the Great Recession, the COVID-19 pandemic gives entrepreneurs a plethora of challenges regarding raising startup capital, especially for women and minority founders struggling to break into an industry where many perceive being a “nerdy white guy” as a prerequisite for entrepreneurial success. Equity crowdfunding, a fast-growing platform, seeks to solve this issue by increasing the scope of venture financing, a move many hope will ultimately democratize the markets.

Up until late 2013, equity crowdfunding was illegal due to regulations that demanded accredited investor status, which requires a net worth of over $1 million or annual income exceeding $200,000. Such criteria limited investing in some of America’s highest-growth companies to institutional investors, venture capitalists, and accredited investors, essentially restricting exponential returns from successful startups to the pockets of the one percent. In response to this dilemma, the Obama administration passed the JOBS act, removing strict accreditation restrictions and opening equity crowdfunding to anyone with a bank account and Internet access.

Once the leash was removed, an entire equity crowdfunding industry emerged, and platforms like StartEngine, Wefunder, and Republic were founded to capitalize on the opportunity. These platforms allow everyday investors to browse through thousands of startups, similar to Kickstarter, and to make equity investments with minimum investment requirements below $100. Such platforms provide alternate sources of capital, which have been especially useful in 2020, a year characterized by unstable markets and limited growth capital. 

Though many agree that venture funding has shown surprising resilience throughout the COVID-19 pandemic, early-stage financing staggered by an estimated 38% since March. On the other hand, equity crowdfunding platforms nearly doubled their capital deployment throughout the pandemic, with WeFunder, StartEngine, and Republic respectively raising $30.4 million, $27.2 million, and $18.9 million for their founders since the beginning of 2020. This may appear insignificant compared to the $129 billion the global venture capital industry is projected to invest in 2020, but the rapid growth of these three platforms may allow them to deploy over $1 billion annually by 2024. With these figures, equity crowdfunding platforms could rise to the leagues of top-tier, elite venture capital firms who can raise over a billion in funding per year.

Additionally, equity crowdfunding has significant potential to fuel the success of women and minority founders, who saw funding dwindle to 3-year lows after the onset of COVID-19. Wefunder founder Jonny Price notes that Black founders typically receive only 1% of venture capital funding vs. over 8% of total capital on Wefunder, with other platforms reporting similar statistics. To further accelerate the closure of this funding gap, several new platforms solely focus on supporting women and BIPOC founders, with iFundWomen and Black Capital working to provide greater access to capital for female and BIPOC founders respectively.

Overall, the equity crowdfunding industry will likely continue to gain traction due to its various benefits; however, the question remains as to whether equity crowdfunding will ever compete fiercely against established venture capital and private equity incumbents. The platform’s early- stage status causes legal barriers, with regulators allowing founders to raise only $5 million every 12 months through the platform. This may be suitable for early stage funding, but more mature startups looking to scale up will require significantly more capital. Crowdfunding also doesn’t connect startups with an experienced venture capitalists, who can provide deep pockets of capital, experience, an established reputation, and a way into exclusive entrepreneurial circles. 

Due to these barriers, equity crowdfunding’s future remains uncertain. However, if it continues growing at current rates – and if it overcomes regulatory and competitive challenges – equity crowdfunding has the potential to disrupt the entire industry, and to democratize venture financing in the process.