Today, because of the JOBS Act and other regulatory change occurring around the world, we’re seeing a renewed focus on innovation in the private capital markets. The technology now being created for accredited investor online platforms and related services is creating greater transaction flow, transparency and, over time, liquidity.
But if you look at the application of these financial technologies (fintech) only in the U.S. markets, you’re going to miss where the innovation is taking place.
Equity and debt crowdfunding is already legal in several European countries, and the next 18 months could see it legalized in a number of new regions, including Malaysia, Singapore, Thailand, Taiwan, Chile, and Mexico.
The deal flow going on in this space is quite exciting. The primary categories of fintech companies we’re seeing are:
1. Platform technology that enables larger numbers of knowledgeable angel investors to gain access to quality, vetted deal flow from trusted sources. Examples include Asset Avenue, AngelList, OfferBoard, and SeedInvest.
2. Access to asset classes that once required a seven-figure investment. Examples include InvestX, Propellr, and SlicedInvesting.
3. Ubiquitous communication tools to more effectively enable angels/angel groups in different geographies to collaborate more effectively, such as SeedInvest.
4. Deal execution and investor relations services to enable periodic and easy communication between entrepreneurs and investors, such as BackerKit, Floship, and other companies in stealth.
5. Online reputation management and trust building services to validate identity and perform deeper background checks at better prices than have been possible before, such as Crowdcheck and EarlyIQ.
6. Real time indices, data standardization, and reporting on private offerings around the world, such as Crowdnetic and LendingRobot.
7. Online educational services to provide relevant information about private company/early stage investing to develop informed angel investors, such as Kauffman Fellows and VentureHive.
8. White space — the new categories of products and services that we don’t know that we need/can’t live without yet. (I’m always looking to hear from more entrepreneurs working in this sector…)
Companies that provide these types of solutions are either already operational today or in stealth preparing to launch. While many great innovators have emerged in the E.U. and U.S., we’re already seeing interesting players in Asia (Dreamaker Crowdfunding, FlyingV, MoolaSense), Latin America (Cubo, Cumplo, Broota), the Middle East (Aflamnah, Eureeca, Zoomaal), and Africa (Homestrings, M-Changa).
Incremental process advancement will not be enough. Every country/ecosystem needs not just platforms but also many other enabling technologies like money transfer, communication, delivery, and reputation management, just to name a few. The companies that succeed will need to create innovative solutions that deliver an order of magnitude of improvement to these processes or new business models in markets that have not changed in decades.
How does this current wave of fintech innovation benefit the broader global markets?
Marc Andreessen, when speaking to the “How to Start a Startup” class at Stanford last fall said, “There are about 4,000 VC-fundable startups each year, of which about 200 get funding from a top tier VC.” I do not dispute his numbers. What I would suggest is that, as fintech innovation revolutionizes connectivity and collaboration, knowledge becomes easier and cheaper to acquire, and new business practices are created, we should be able to double this number of VC-fundable companies in less than 10 years.
Our success in doubling that number will be directly related to the opportunity for this new wave of fintech innovation to enable entrepreneurs to access capital from an audience of educated, connected investors, that live over 60 miles away from Palo Alto, Calif.
[Disclosure: My firm, Crowdfund Capital Advisors, advises and/or has invested in 5 of the 27 companies named in this article: Crowdnetic, Early IQ, Offerboard, SeedInvest, and Zoomaal].
Jason W. Best is a partner at Crowdfund Capital Advisors. The firm provides strategy and investment advisory services to professional investors, governments, innovators, and financial institutions. Jason and CCA principal Sherwood Neiss are credited as the creators of the regulatory framework used in Title III of the JOBS Act and have now worked in 30 countries to improve financial technology and access to capital. Jason also co-authored The World Bank’s Research on Crowdfunding and Crowdfund Investing for Dummies. You can follow him on Twitter @CrowdCapAdvisor.
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