Equity Crowdfunding: Creating Unique Opportunities for Startups and Investors Alike

By Howard Marks, CEO and Co-founder of StartEngine

This is a very exciting time for equity crowdfunding. We have seen over 480% growth over the last three years in terms of amount raised for companies. We've seen equity crowdfunding transition from a fringe consideration by startups and founders, to a very viable alternative to the traditional route of Venture Capital.

The Funding Challenge

One of the key funding challenges for small businesses, particularly startups, is gaining access to capital markets. A small pizza startup simply cannot scale on a competitive level with a public company like Domino’s, because it can’t leverage public capital in the same way.

58% of startups have less than $25,000 at their disposal during the startup phase. When you consider the resources that go into starting a business, this is simply not enough. It leaves a huge market of startups that need access to capital sources, just like larger companies do.

Only 0.5% of startups are able to secure venture capital investments. 0.5%.This clearly demonstrates that there is a void in private equity that needs to be addressed. Equity crowdfunding provides an opportunity for the remaining 99.5% of startups that can’t get their foot through the door with venture capital.

Crowdfunding gives companies more control over the terms of their capital raise. Founders can issue common shares, and maintain control of their businesses, deciding up front how much they want to raise, and how many shares they want to issue. Venture Capital firms tend to be more structured. Terms can be steep and dictated, with investors potentially gaining control of one's business in return for capital.

Gaining an Audience

Crowdfunding companies develop followers, potential customers and investor bases, meaning startups can access an audience for their products and ideas. Health and biotechnology companies can share what they’re working on with the public, and gain support before they are even commercial.

There is also a remarkable diversity within crowdfunding. Whereas there is a certain type of mold that typically gains access to private equity financing through traditional routes, I’ve seen everything from organic foods, to startup health tech companies working on joint replacements, all the way to drone companies, all seeking the equity crowdfunding route to finance their ventures. This diversity also means minority founders and women have real access to capital at their own terms. This does not exist in traditional sources.

Retail Investors Have a Whole New World to Invest In

I think accessibility, and democracy of markets is incredibly important. For the longest time, accredited investors held the keys to private equity. In the last 90 days, retail investors couldn’t invest in these types of alternatives within the private sector, even if they wanted to. The changes in laws, and the ability for startups to go straight to the crowd, has given retail investors a new avenue for investing.

Frankly, it’s an option they always should have had at their disposal. Of course it is more risky than an index fund, and requires good research and analysis, but that doesn’t mean it should only be an investment option for the big guys.

Continued Growth

The accessibility of crowdfunding means that it will continue to become a more mainstream option for raising capital for a business.

The industry is continuing to grow. The convenience of the process for startups creates so much potential across a multitude of industries. Again, the beauty of crowdfunding is it is adaptable to different businesses and types of investments. Whether companies are carrying out regulation CF raises, or raising far more capital through regulation A+ campaigns, virtually every type of business has the potential to raise capital via equity crowdfunding. Given that such a small number of startups are able to secure venture capital investments, there is such a large market for this type of capital raise.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Venture Capital