The Disruption of Early Stage Funding Models

by WeMultiply

by Alex Topchishvili, Marketing Director, Wemultiply 

1-ZWBqdBraE9E5gA1wYqN8mwPrior to the implementation of the Securities Acts of 1933 and 1934, capital markets in the US were effectively governed by the ‘law of the jungle’ — market conditions that led to the stock market crash of 1929. These regulations significantly constrained the ability of non-accredited investors (those without significant income or net worth) to participate in the private capital markets, and completely banned the marketing of non-registered securities to the general public. This had the effect of severely restricting access to financing, as well as the ability of the majority of Americans to invest in these markets.

Since that time the US private capital markets have evolved significantly. This series of posts will seek to highlight some of the key events that have driven changes in funding models throughout the past century — with a focus on the rise of the modern crowdfunding model and some of the recent regulatory changes that are influencing the market; the implications of these regulations and market forces; and, our thoughts about the changes that are yet to come.

In the post that follows, we explore the evolution of crowdfunding and the catalysts that drove the disruption of traditional funding models.

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Traditional funding methods involve variations on a single basic structure: a group of investors who assemble a pool of capital, and use that capital to fund specific deals.



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There has been significant pressure applied to the traditional model:

1. The Internet has provided a platform of communication for every individual with an idea or with a dollar to invest.

2. The advent of secure online payment processing helped individuals to develop a comfort level with providing a credit or debit card — knowing their cash and credit are safe.

3. Today’s social media-driven culture has allowed for the distribution of ideas, campaigns and investment opportunities to a much wider audience than was ever previously possible.

4. The dotcom boom and the millennial-driven ‘maker’ movement have given rise to thousands, if not millions, of dedicated, internet-savvy entrepreneurs seeking to fund new and innovative ideas.

5. The financial crisis drove many traditional investors to turn to safer assets with higher yields, creating a significant early stage funding gap.

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These catalysts proved significant enough to drive the ascent of the modern crowdfunding model — where many smaller investors leverage an online platform in order to gain direct access to deals or campaigns; and, where companies, individuals and ideas can compete to attract funding.

This methodology is presently revolutionizing the capital markets and driving the democratization of access to capital and investment opportunities.