Blockchain & Private Equity. A Disruptive Influence?

Equity crowdfunding is now a larger source of startup financing than traditional venture capital and has been growing at a phenomenal rate in the last 5 years. Crowdfunding has been described by Goldman Sachs as ‘potentially the most disruptive of all the new models of finance.’ This article is based on my presentation to the Jersey branch of the Chartered Institute for Securities & Investment in February 2018.

BLOCKCHAIN

The original blockchain is the decentralized ledger behind the digital currency bitcoin. In the 9 years since its inception, the blockchain has not been hacked.

Because of this level of security a decentralized ledger could be used for self executing smart contracts with no need for a ‘trusted’ intermediary.

The revolutionary idea of creating tamper-proof databases and streamling transactions has captured the attention of everyone from Walmart to Wall Street.

CROWDFUNDING

Many people in your community and around the world will have used crowdfunding sites like GoFundMe for charitable causes. Crowdfunding has been used to fund a wide range of for-profit entrepreneurial ventures such as artistic and creative projects, medical expenses, travel, or community-oriented social entrepreneurship projects.

A Brief History of Crowdfunding

Crowdfunding has a long history in different forms. In Germany in the 18th century, for instance, it was common practice for a publisher to sell a book that was planned but had not yet been printed, usually at a discount, so as to cover their costs in advance. The subscription business model is not exactly crowdfunding, since the actual flow of money only begins with the delivery of the product. The list of subscribers has, though, the power to create the necessary confidence among investors that is needed to risk the publication.

War bonds are in theory a form of crowdfunding military conflicts. In the 1730s when customers demanded their pounds be converted into gold, London’s mercantile community saved the Bank of England by supporting the currency until confidence in the pound was restored, thus crowdfunding their own money.

Crowdfunding today

Crowdfunding platforms, such as Kickstarter offer a means of funding innovation, connecting inventors and entrepreneurs with a multitude of supporters, who each provide a small fraction of the amount required to fund the project.

Democratization of funding.

A recent study, by The Wharton School of the University of Pennsylvania, found ‘a very strong relationship between the growth of crowdfunding between 2009 and 2014, and the growth of follow-on venture capital investment activity in those very geographies around the United States that have not traditionally attracted a lot of capital. All of that is to say that crowdfunding appears to be democratizing access to capital among a larger pool of innovators who are coming up with innovative ideas around the U.S.’

EQUITY CROWDFUNDING:

In 2016, equity crowdfunding overtook venture capital as a source of funding for startup businesses.

The success of crowdfund supported companies like Brewdog has shown that the platform can be attractive to equity investors that expect a return on their investment.

Top 5 Benefits of equity crowdfunding are:

1. Access to capital. Prior to the JOBS Act, startups were prohibited from discussing capital investment with potential investors. This forced entrepreneurs to be limited to personal networks to raisefinance. The JOBS Act allows entrepreneurs to raise funding, via online equity crowdfunding platforms, from accredited investors.
2. Costs . Crowdfunding has a lower barrier of entry for startups compared to traditional funding routes. Many crowdfunding platforms charge nothing to start your campaign, and if you raise funds through the platform you only pay a small fee.
3. Leveraging the Crowd. Investors can drive long-term engagement, loyalty, and advocacy. Entrepreneurs can now utilise the power of the crowd for feedback, comments and ideas, which are especially important during the startup stage. As AngelList founder Naval Ravikant says, ‘angels and VCs bring expertise, but the crowd brings customers and fans.’
4. Spreading the risk. Equity crowdfunding investors are a large pool of investors investing at lower levels, lowering the overall risk.
5. Democratizing and decentralizing. Over the last 30 years asset prices have grown much higher than wages for the majority of people. Giving people an opportunity to invest in the future Google, Amazons etc would open up the private equity market to millions more people.

BLOCKCHAIN & PRIVATE EQUITY- Opportunities

Deal Execution

Closing a transaction is expensive, in both time and money. With its unmatched data integrity, blockchain technology can make workflow more efficient. As more asset records move to blockchain record-keeping systems, the process of transferring ownership will become simpler and cheaper resulting in lower fees for investors.

Fundraising

Blockchain technology companies are inventing completely new models for fundraising and growth investments. In recent years, startups in the blockchain space have realized an unprecedented model of high-tech fundraising. A development team will conduct a “crowdsale” of the cryptocurrency that will power their product, but before the cryptocurrency, its blockchain, and the distributed network that processes it is actually in production. New technical methods of fundraising combined with existing platforms and more permissive regulation schemes such as the JOBS Act may very well power the personal investment landscape of the future.

Investor relations:

By removing system redundancies that can mask true share ownership, blockchain technology would make IR simpler, faster, and more reliable.

Over the last couple of decades, communication and shareholder data has largely moved from paper to digital formats, yet the industry has still been plagued by onerous administration. Shareholder ownership can be complex, and there has traditionally been no clear way of distinguishing between the legal owner and beneficial owner of a security. Blockchain could revolutionize how securities are transacted and managed. For the first time, it would be possible to create real-time, highly robust registration and settlement systems with which existing services can’t compete.

Decentralized securities networks could transform shareholder communication and the business of IR.

Conclusion

For new investors these platforms offer a way to become involved with an asset class that can redistribute the world’s wealth and even change the way we make a living. Blockchain will give security and low entry and transaction cost into this new investment and equity space.

Equity crowdfunding is already a major source of equity funding and can develop into a way of redressing imbalances in business and personal finances globally. It holds enormous potential to reshape the investment world by driving innovation and creating new opportunities for more people to invest in companies and have a stake in the rewards of their growth.

About the Author: Elliot La Cour is a co-founder of Crowd-Up, a startup that plans to change the way equity crowdfunding works by using the power of blockchain technology.

Blockchain & Private Equity. A Disruptive Influence? was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.