It’s 2013 and the New Finance movement has got some serious #momo. Crowdfunding / investing, in and of itself, is one of the hottest industries on the planet this year, while the façade that is the traditional finance industry continues to erode as their business strategies (ie. currency cartels) are revealed on a weekly basis. Now that the gates are opening up and some capital is starting to flow into the New Finance ecosystem, we are starting to see money moving into the companies that actually create real value in the economy. The redistribution of dealflow has begun.
What’s driving the redistribution of dealflow?
The simple answer is demand. The bottom tier of the market, which would include early-stage enterprises and small businesses, is starved for both startup and growth capital. While certain sectors receive excessive amounts of seed and/or growth capitals (ie. social media and mobile), others are starved (ie. consumer products) and rely on a patchwork of credit products and family investment to survive, neither of which have any value-added strategic benefits.
The entire sector of the traditional finance industry, including the angel investors / venture capitalists / institutional investors / pension funds, have played a role in creating a financial system (and consequently an economy) that is over leveraged, unbalanced and out of touch with the real needs of society.
Fred Wilson himself, arguably one of the best venture capital and early-stage investors in the world, believes that the crowd-finance movement will force VCs to rethink their role in the finance ecosystem and help to reallocate capital to where it is needed most (ie. less mobile & media, more medical). Others, such as John Fullerton, a former managing director of JP Morgan, have left the mainstream investment industry all together and created firms (The Capital Institute) that are 100% focused on rebalancing the financial system and synchronizing our economic system with the world around us.
And so we are starting to see the distribution of capital to companies that are built to solve real problems for the communities around them.
Seedrs, an online portal for early-stage investment (< £150,000) in the UK, is one example that we have talked about several times on the blog. Another example is Bolstr, the first crowd-based investment platform to launch Pre-Jobs Act, which found a way to allow small businesses in the Chicago area to raise up to $1,000,000 per year within the current regulatory framework. Investors on Seedrs get a true equity stake, whereas Bolstr’s investors get a share of revenues, but both portals are open to the crowds and allow everyday people to participate.
Around the world, a series of crowdinvestment-type platforms are starting to emerge to serve specific underserved sectors in the economy..
One such example is Circle Up, a platform based out of California that focuses exclusively on funding high-growth consumer companies. According to a recent interview, the consumer-product segment is badly underfunded at the early-growth stage, as ~4% of total VC capital in the US went to a segment that represents 15-20% of US GDP. That’s why Circle Up is stepping in and helping companies looking to raise (roughly) between $0.5 and $2.5 million.
They generally only accept ~2% of applications receieved and have another level of strategic services that they offer to help the companies they source capital for grow. While not a pure ‘crowd’ platform, as only accredited investors can invest, it is a good example of how firms are using social technologies to bring capital to the companies that need it. A quick look at the companies that have successfully raised funding on Circle Up shows many upstart organic food companies (ex. Peeled Snacks), who are essential in helping to rebuild the food ecosystem.
In terms of finding ways to increase lending to small businesses in the wake of the credit crisis, one great example is the UK government’s new Business Finance Partnership. They have teamed up with the nation’s leading crowd-lending platforms (ie. Funding Circle) and created a £110 million fund for the next-generation of UK SMBs. Combine that with the UK’s booming crowdfinance portals and the new SEIS program, and you can see the pieces for the New Finance ecosystem coming together quickly.
Eventually, as the regulations are hammered out and more people begin to trust these new ecosystems, private funds and public institutions will start to invest through these platforms and create their own ‘crowd funds.’ From top to bottom, the sector is being reinvented to facilitate the redistribution of dealflow to where it matters most – and everyone will be able to participate.
After all, one only needs to grab a newspaper or read a few articles online to see that the system we have in place is completely unsustainable and unbalanced. There is no shortage of great opportunities to invest in / entrepreneurs to build businesses around, but none of it matters if they can’t get the capital they need to move forward. Now that the New Finance movement is gaining #momo and the tides are turning, the time has come to rebuild the financial ecosystem and spark a new generation of enterprises.