Equity Crowdfunding 3.0 – The ‘Killer’ Feature

Equity Crowdfunding 3.0

According to WordSpy.com, the word “crowdfunding” was first used in August 2006, by Michael Sullivan, who launched Fundavlog, a failed attempt at a videoblog content incubator to what now is a $34.4bn industry as reported by the Crowdfund Insider.

I’m particularly excited about Equity Crowdfunding and how it will enable SMEs to obtain vital resource – money. The industry has built its presence to an astounding $2.5bn as of the end of 2015, expected to double in 2016. Everyone wants to find the new Facebook these days. If you do find one, let me know – I’ll chip in and in return, you can have your photo on my homepage 😉

Since the days of Michael Sullivan’s attempt at crowdfunding his video content incubator in 2006 (YouTube started in 2005) Crowdfunding has hardly changed. People started filming crazy videos to attract attention and get PR, but systemically the process stayed the same – here are 10 craziest campaigns. Grilled cheesus anyone? Or maybe you’re after fly-killing shotgun? Anyway, back to reality now. However, this is about to change with Equity Crowdfunding 3.0 approaching fast.

Crowdfunding 3.0 - FinTech

What will Equity Crowdfunding 3.0 look like?

A real ‘killer’ feature will be added – a secondary market that will enable investors to ‘cash out’ early. This feature will be particularly powerful with the equity crowdfunding model, where there is not fixed time frame for an exit and investors are unable to cash out if their circumstances change.

Such mechanism has the potential to open up markets that were out of reach for most platforms. People will be more willing to ‘give it a try’ and potentially become big investors in the future.

Challenges for the platform

Ensure sustainable liquidity at a fair price. This can be achieved by creating a steady flow of funds into the secondary market. Liquidity is a false friend, always there for the good times and never there for the bad ones. Like the neighbor next door always shows up for the parties but never offers to help you clean up.

Build a valuation mechanism. The share price of the company has to reflect the progress it has achieved against its targets. A company that failed to meet targets 3 times in a row can’t be worth the same as the initial purchase price because it will dry out any secondary investment into it.

Challenges for the company

How will crowdfunding affect further funding? If the share price has been dropping how will VCs react to this? How will the public react? Is this going to close the gates for obtaining money in the future? Arguably VCs will already have superior information to retail investors, but psychological factor may well come in play here.

How will this affect employees? Should they be able to cash out via secondary market? Would that make into a much more attractive option scheme? On the other hand, an employee without options will be less motivated. Or could jump the ship if the share price moved unfavourably. Right option structure plan would likely solve this issue.

The secondary market for crowdfunding platforms would be very exciting and open up a whole new level of startup and SME funding. I will be following the industry very carefully. What do you think?

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Alex

I’m a #26 Global FinTech influencer. An Economist by profession, I have worked on both sides of the table – tech startups and global financial organisations. I love football, technology, travelling and photography.