As editor of a magazine about equity trading, I’ve often wondered over the last five years whether the heady days of headline-grabbing new issues would ever return.
Big initial public offerings (IPOs) on major western exchanges have been few and far between for obvious macro economic reasons since 2007. And on the rare occasions they have come along, some controversy or other has spoiled the party, most notably in the case of Facebook’s 2012 launch on Nasdaq, which is still paying out compensation.
Economic cycles and exchange glitches notwithstanding, it also seemed possible that the IPO was no longer a critical step in the development of an expanding business. The treadmill and tyranny of the quarterly results season seemed to be permanently losing its appeal for some listed firms, which decided to go private instead.
Meanwhile, family and state-owned enterprises carried on growing without needing to list as new forms of funding emerged, often supported by advances in information technology, specifically social media.
Primary among these was crowdfunding, the use of social media to present a project or business plan with the aim of sourcing funding from a wide variety of, typically, non-professional investors. If enough investors could be reached and nurtured and rewarded over the Internet, would companies need to engage them via traditional means ever again?
At this stage of its development, however, crowdfunding looks like more of an alternative to venture capital, private equity, angel investing or old-fashioned small business lending (just in time, perhaps, with many banks losing their appetite for lending to start-ups in response to Basel III capital adequacy requirements).
Kickstarter, the biggest crowdfunding website, recently released its figures for 2013, and these can be seen as a bellweather for the progress of the industry. Kickstarter launched in 2010 and last year attracted pledges of US$480 million from three million individuals. This is a significant increase on the 2.2 million people who pledged US$320 million to projects in 2012, which resulted in actual funding worth US$274 million, spread across 18,109. Money is only invested – and Kickstarter only makes its 5% flat fee – if the project reaches its funding goal.
Although 19,911 projects were funded in 2013, Kickstarter has not yet released the total amount raised. Why? A clue lies in the average funding levels achieved by the top five biggest projects: 30% lower in 2013. While the makers of the Pebble smart watch sourced US$10,266,845 and OUYA – a hacker-friendly gaming console – tapped investors for US$8,596,474 in 2012, last year’s biggest hit – the Veronica Mars movie (which revives a cancelled US TV show) – attracted just US$5,702,153.
The sums raised on Kickstarter are not going to have Nasdaq or the New York Stock Exchange quaking on their boots any time soon. In its almost four years of operation, just 55 firms have raised US$1 million or more through the site. But research from ConvergEx indicates the trend is undeniably positive and there is good reason to think that crowdfunding can provide venture capital (VC) a run for its money, in no small part for its ability to reach the right demographic for smart, tech-savvy ideas via a medium with which both investor and entrepreneur are comfortable. As Nicholas Colas, chief market strategist at broker and technology provider ConvergEx, noted recently, “Instead of pitching ideas to VCs, angel investors or other sources of seed and early stage capital, business owners can pitch a product directly at consumers and see if they can pre-sell enough units to bring the idea to life.”
Clearly crowdfunding has some way to go before it can be seriously considered as an alternative to the IPO. Or has it? Last year, TABB Group predicted that alternative financing mechanisms, including crowdfunding, could account for US$150 billion of funding for small- to –medium-sized enterprises globally by the end of 2015. This may still be a small portion of total SME funding, but it is far from insignificant, particularly with many banks withdrawing from non-domestic lending business, a trend that is hitting many small businesses hard.
If crowdfunding does take off and become a serious alternative to the IPO, it could lead to a new wave of automation in the primary market, similar to that seen in the secondary market over the past decade. As TABB director of research Adam Sussman noted, “With alternative financing, it will be necessary to automate processes because liquidity will come from a very long tail of small investors, not a few large institutions. With a large number of very small initial offerings, an efficient, fixed-cost infrastructure will be critical.”
What do you think the next stages for crowdfunding will be and which traditional financial services businesses have most to fear?