Equity crowdfunding gaining momentum as VC and angels slow

A recent study by Juniper Research shows that the crowdfunding industry is likely to see accelerated growth, driven by equity crowdfunding, which is expected to double by 2020. The study notes that the growth in equity crowdfunding comes as traditional investments from venture capitalists and Angel Investors slows. It also shows that crowdfunding platforms are investigating hybrid models for investing, giving investors the option of investing in the equity or debt of a company or project, and moving away from one-off rewards-based models, following the JOBS act, which has eased certain regulations that govern the sector.

The proportion of technology crowd-funding investments based on equity will see significant growth, says Juniper.

Global investments made in technology via crowd-funding platforms are set to increase sevenfold from an estimated $1.1 billion in 2015 to $8.2 billion by 2020.

This is according to Juniper Research's recent study which found that the crowd-funding industry is to see an accelerated growth from the lucrative, but less well-known, method of funding known as 'equity crowd-funding'.

The proportion of technology crowd-funding investments based on equity will see significant growth, almost doubling by 2020, says Juniper.

This is against an investment market that is currently seeing a slowdown in traditional investments from venture capitalists (VCs) and Angel Investors, it notes.

The UK is the leading market for the regulation of equity crowd-funding, with the establishment of successful platforms such as CrowdCube, says Juniper.

Juniper believes that other nations will follow this model by legislating to allow less sophisticated investors to engage in equity crowd-funding.

The 'Reward' crowd-funding model, popularised by the likes of Kickstarter and Indiegogo Juniper, has been the most widely adopted, says Juniper. But it has suffered recently following a number of high-profile failures, such as the Zano drones debacle, it adds.

The Zano mini drone was a Kickstarter campaign that raised more than £2.3 million and shut down.

Platforms are beginning to look at more hybrid crowd-funding models, whereby users have the option of investment in the company or project itself via equity or debt, rather than receiving a one-off 'gift' for their support courtesy of the rewards model, notes Juniper.

The hybrid concept has been demonstrated recently, with video games crowd-funding platform 'Fig' hosting projects to be backed through a combination of the rewards and equity models, says Lauren Foye, ?research analyst at Juniper.

"Equity is attractive for consumers, who feel they may be investing in the next 'Oculus Rift' or 'Pebble Time', hence in line to make a significant profit."

According to the World Economic Forum, the future of financial services alternative funding platforms are not likely to replace the traditional capital raising ecosystem in the short or medium term, however their growth could change the role of incumbent institutions.

Maija de Rijk-Uys, accelerator at PwC SA, says the World Bank estimated that crowd-funding would reach $90 billion by 2020.

"If the prediction holds that crowd-funding is doubling in size annually, we will see this number by 2017," she adds.

But, there is a huge amount of uncertainty when it comes to the accounting rules for funds raised through crowd-funding, says de Rijk-Uys.

Also, regulations and "checks and balances" like for traditional funding platforms and listed exchanges are yet to be developed for crowd-funding, she adds.

Michael Dempsey, of the research and data analysis team at CB Insights, says the model of crowd-funding contributing the most towards the technology industry in the US is currently the Kickstarter model which is built around pre-purchases, not equity crowd-funding.

However as the JOBS act - a law intended to encourage funding of US small businesses by easing various securities regulations comes into effect and sites like Angel List see increased activity, this could change, he adds.

Looking into the future, Dempsey says market places for equity crowd-funding will mature and lead to a continued increase in angel investors.

"Whether having an increased prevalence of what some call 'dumb money' is a good thing for the ecosystem is debatable."