Private Equity Crowdfunding

May 20, 2013

If you are in any way involved in the angel side of private equity investing, you’re likely well aware of the debate regarding the usefulness of crowdfunding, and specifically private equity crowdfunding.  Crowdfunding exists because there is a general void in the marketplace between what angel investors are willing to, and able to, fund and what larger scale private equity firms and institutional investors are willing to look at.

With revenue of less than $10 million annually, entrepreneurs in many industries, with the exception of certain technologies, are too small to reach the larger private equity firms and generally don’t have sufficient assets to issue debt.  Essentially, a decent number of entrepreneurs fall between the angel investing arena and the size of deals venture capital/private equity firms might consider.  Within the past couple of years, the solution to this investor-entrepreneur matching problem has been partly addressed by a new form of investing: private equity crowdfunding.

The debate: is private equity crowdfunding here to stay as a innovative new way of financing start-ups and business job creation, or is it a trap luring unsuspecting investors into higher than usual risks on unproven businesses?  The question is tough to give a “no” answer to, for one main reason that momentum is on private equity crowdfunding’s side, with such new firms as CircleUp, RelayFund, or MicroVentures livelihoods depending on crowdfunding’s success.

Private equity crowdfunding proponents point to at least two efficiencies gained by their services. First, by screening deal flow (for instance, CircleUp only accepts 2 percent of companies that apply), it limits the number of poor deals an angel capital or private equity investor sees.

Second, by bringing deals online, it expands the number of potentially profitable investments that angel investors may not have seen offline.  Essentially, instead of choosing one investment from the limited presentations an angel investor sees, an angel investor’s opportunity set increases.

On the opposite side of the debate are (and perhaps unsurprisingly) individuals concerned with regulations, in particular the heightened problems crowdfunding places on attorneys responsible for ensuring compliance with reporting requirements.  In addition to the regulatory concerns, others appear more concerned about smaller investors (the paternalistic sort of view).  Basically, some fear that smaller investors will be enamored with the charismatic presentation or invest in companies they simply want to see succeed regardless of whether the charismatic presenter or liked business has the highest chance of turning into a successful investment.  With a few years behind us already, the initial paternalistic concerns don’t appear to be a problem, although, we’re only a few years into this potentially disruptive industry.

Overall, private equity crowdfunding has the potential to be a game-changer in the private equity and angel capital investing arena, with at least $50 billion of annual private company investments on the line.  We’ll see if it turn out to be a boon to entrepreneurship, business growth, and job creation while simultaneously benefiting all types of investors or whether it turns out to be simply a fad.

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