May 16 marks the sixth anniversary of crowdfunding under Regulation Crowdfunding. But it was the JOBS Act of April 2012 that made it possible. Whether you go by 10 years ago or six years ago, crowdfunding has come a long way.
Millions of Americans are participating in this investing space. Crowdfunding portals Wefunder and StartEngine both claim to have 1.5 million investors in their communities. New York-based portal Republic isn’t far behind. In 2021, the three of them accounted for nearly 85% of the $457 million invested and 79% of total deal flow.
I expect crowdfunding to continue to grow at a 50% to 100% annual rate. That’s an easy prediction. But what else is in store for this still emerging investing space? Here are five more things to watch out for in the next 10 years.
Get Early Investing into your inbox
Become a smarter investor in startups, crypto and cannabis by subscribing to our FREE newsletter filled with market research, trends and expert analysis.
- Things will go global. With a few exceptions, anybody from anywhere can invest in an American startup’s crowdfunding raise. But non-U.S.-based startups can’t crowdfund in the U.S. They remain tantalizingly out of reach for American investors. But things are changing. The European Union is harmonizing crowdfunding rules across its 27 member countries. Republic has bought UK startup portal Seedrs. And its co-founder will guide Republic’s entry into Europe. Republic has also bought a Korean startup portal. The startup world is getting smaller. The rules will have to continue to evolve, following the EU’s example. And I think they will. I also believe the wait will be shorter than you think. There are already workarounds. A company that previously raised on Wefunder — Expert DOJO — has made 100 startup investments in more than 30 countries. Another startup, Untapped Global (which I recommended to our First Stage Investor members a few months ago), “taps” into low-risk, solid-growth entrepreneurial opportunities in several emerging economies. And there’s nothing preventing the most promising early-stage overseas startups from incorporating in the U.S. in order to tap into the growing pot of crowdfunded capital. We should see more of that too.
- Institutional FOMO will strike. Crowdfunding doesn’t need a pension fund’s stamp of approval. It’s grown rapidly without the participation of institutional investors, thank you very much. But the financial rewards will prove too tempting for institutional investors to ignore much longer. It’s just a matter of time before they join the party. Right now, the fit is still awkward. Institutional investors don’t like risk — especially risk that’s difficult to measure or predict. And that pretty much describes startups. But you could say the same thing about bitcoin and other major cryptocurrencies. Yet institutional FOMO has finally arrived in the crypto space. Even Goldman Sachs has taken the plunge. I don’t think early-stage startups are far behind. Startup risk isn’t particularly transparent or easy to understand. But with some basic education and more tools to work with, institutional investors will figure things out. And more tools are coming. The data-driven analytical tools being developed by KingsCrowd (the company that owns Early Investing) are a great example of this.
- The accredited investor definition will expand and eventually disappear. The accredited investor tent is getting bigger. And that’s a good thing. In 2020, the SEC expanded the definition of accredited investor to include investors “based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth.” And the SEC is encouraging the public to submit proposals for other certificates, designations, or credentials to be considered. But there’s already a strong odor of arbitrariness to these qualifications. Why does $1 million in net worth qualify someone and not $1.2 million or $900,000? Why do certain licenses (Series 7, 65 and 82) qualify someone and not others? It’s going to get even more random. Moving forward, we’ll be asking ourselves why some tests and credentials qualify some individuals but not others. The more people who are allowed inside the tent, the more arbitrary the requirements are going to feel. It’s bound to reach a point where the definition of accredited investor becomes so arbitrary that it loses its meaning… and usefulness. That’s when the SEC will drop the accredited investor category altogether. It’ll happen toward the end of the next 10 years.
- The portals will get bigger… and smaller. There are already too many crowdfunding portals. Most won’t survive the next 10 years. A handful will become dominant. They’ll attract huge communities of investors… raise huge sums of money… and cover a multitude of verticals. Other portals — by choice or circumstance — will become more specialized, or boutique portals, and cater to a smaller universe of investors. They will specialize by sector (robotics, for example), type (moonshot opportunities), geo-location (Miami startups), or verticals (collectibles), just to name a few. We’ll have very big and small portals. And the middle will disappear.
- The demand for secondary markets will remain low. For better or for worse, the big quest for liquidity continues! And I say for worse. Access to up-to-date information will dramatically improve. So investors will have a better sense of how a startup is performing at any moment in time. But then what? If it’s doing well, why sell? And if it’s doing poorly, why buy? This quest is going nowhere.
So there you have it. Please refrain from making bets based on these predictions. They’re just one semi-demented person’s sense of what may come. I make no promises except this one: I’ll get back to you in 10 years. And we’ll see how I did.