Equity crowdfunding is a relatively new form of fundraising that allows startups and small businesses to raise capital by selling shares of their company to a large number of investors through online platforms. The industry has seen significant growth in recent years and is expected to continue to grow in the coming years. The global crowdfunding market size was $17.51 billion in 2021, and it is expected to reach a value of $42.93 billion by 2028, at a CAGR of 16.40% over the forecast period (2022–2028).
As DealMaker has been in the space since its inception, here are some key predictions for 2023 and beyond:
1. Expect a heighten regulatory environment.
Tightening monetary policies may come from FTX and crypto fallouts that are highly visible in US and the globe. “Unsecured” and “unenforced” securities will be under greater scrutiny. The SEC has already publicly disclosed that significant resources will be devoted to digital assets and cryptocurrencies, investment adviser misconduct, corporate disclosures, compliance with the marketing rule, disclosures to retail investors, valuation and board oversight, liquidity risk management, fees and expenses, undisclosed conflicts and the use of text and chat messages for business purposes on unarchived platforms.
Not to mention that cybersecurity and cyber threats will also continue to target Fintechs, and some early entrants into the Funding Portal space may have some data breaches to report if they aren’t buttoned down with technology compliance with regards to customer data and/or customer financial data.
Conversely, if the JOBs Act 4.0 passes, could see a few key improvements supported by the SEC, such as:
Expanding permitted size of angel funds (up to 500 investors) and maximum capital up to $50 million; expands access to angel capital for small and medium sized companies
Allowing VC funds that are not registered with the SEC to acquire eligible portfolio investments through the secondary market
2. More multi-jurisdictional deals
Interest in getting in early to a powerful idea spans the globe. Investors from all jurisdictions are eager to invest. The focus will shift away from US-only investor deals and platforms to a more global shareholder approach. This is not without its challenges - which is why isn’t not truly been done before. Compliance for securities differs not only from country to country, but in most cases state-to-state as well. Streamlining processes for filing, disclosures, audits and terms requires a standarized process across jurisdictions. We understand how much work this is on the back-end, as we’ve gone through it and can power deals with global investors.
"Thinking that startup fundraising should be bound by country limitations is short-sighted. The hurdle is a compliance and regulatory one, but as we are setting the industry standards, our view is that investors are global and the opportunity to allow for multi-jurisdictional deals is huge. It's not an easy ask, and navigating regulatory bodies and compliance is tough - but if Amex and Visa can do it, so can the capital markets." - Rebecca Kacaba, CEO & Co-Founder, DealMaker
3. Digital securities will revolutionize how financial services and fintech think about their next strategic opportunity
Financial services as a whole is on the cusp of a revolution, and private digital securities are the next huge opportunity in our opinion. Imagine having your bank, stock investments, RRSPs, employee shares, and startup shares, NFTs, crypto all in one single place. It’s coming… we think we’ll see some early movers on it next year.
The concept of Open Banking has really improved customer experience with managing their money - putting access and control into the consumer’s hands and making ‘connections’ from banks to apps seamless. However; like Web3, the next phase of this will not be consumers having 6 apps/wallets on their phone… the future will be a player that effectively consolidates all types of money management in a mobile-first intuitive platform.
4. Smart founders will add “INVEST NOW” on their website & build/own their investor pool
Many smart founders, VC Funds, and Incubators are realizing that you can acquire customers and turn them into shareholders - which is an incredible ROI for not just the cost, but the effort. Building a community of supporters helps all top-line KPIs: recurring revenue, customer acquisition costs, customer lifetime value, monthly active users… the list goes on and on. Owning your investor pool by choosing a self-hosted raise sets you up for success in the long run.
“Raising capital online follows the same trendlines as eCommerce more broadly - it represents a shift from traditional methods of buying and selling towards the internet as the dominant medium of communicating and transacting. This trend will only deepen and accelerate - especially as more and more companies turn to their trusted customers, partners, and followers as a source of capital. Major brands have enourmous newsletter subscribers and instagram followers. More and more, those brands will recognize these followers as a source of capital.” - Mat Goldstein, Co-Founder & CSO, DealMaker
5. Recession predictions will challenge both valuations and likely VC deal count
Valuations have continued to ‘right-set’ from 2020/2021 highs, and pressure in the market (cost of borrowing/inflation) will continue to cause a dip in early 2023. Recession predictions may cause deal counts may level-off as those companies that aren’t in a dire need for runway may pause raising until macro-economics look more positive. US VC deal by quarter (source: Pitchbook) shows that deal activity continues to decline, though drop-off lessens QoQ.
6. Growth in ECF, Despite Stock Market Dips
Crowdfunding Market to Reach $42.93 Billion by 2028 as entrepreneurs/founders are bypassing traditional routes and opting for a more Modern Finance Solution that aligns with long-term customer acquisition goals.
“2023 will see the continued rise of community based investing - whether that is fans investing in brands they love or new communities forming to invest because of a common interest (i.e.: impact investing in social or environmental startups, local innovations, etc.). Investors are increasingly looking to invest in opportunities outside of the public markets in companies that align with their personal mission and beliefs. This will lead to a whole new group of entrants into retail capital raising as larger and very established brands recognize the power of their community as a sustainable source of capital while ‘traditional’ financing options remain on hold in a volatile landscape.” Mike Werry, VP Sales
In a recent survey authored by Crowdfund Insider and World DigitalFoundation, 65% respondents (private companies) shared they are looking to raise in 2023 and 86% show high confidence in the market, despite the recession predictions.
Full report here
Another survey result that bodes well is that 80% of the Private Companies survey are considering Equity Crowdfunding, while only 55% are planning on going the VC route. This could be because of predictions also that VC and LPs will continue their 'pause' through to Q2.
“Strong companies continue to raise successfully in a sideways or even a down market; as evidenced by Miso Robotics raising over $11M in just 30 days during Q4 2022, there is still plenty of investor appetite to own shares in “the next big thing” even when the public markets are tumultuous. With more macroeconomic uncertainty ahead in 2023, this may compel other companies that would have otherwise raised traditional VC to explore a Community Round. As such, there will be an exciting batch of companies that retail investors now have access to.” - Jon Stidd, President, DealMaker Reach
7. CBDCs, NFTs, crypto and other blockchain opportunities could enter the regulated space
Central Bank Digital Currencies (CBDCs) are digital tokens, similar to cryptocurrency that are essentially the digital equivalent of the country’s currency. Over 100 countries are currently experimenting with CBDCs, and some have even implemented them. Essentially, CBDCs can play a key role in draining unnecessary intermediaries from the existing financial system into the digital realm. Besides reducing economic friction by reducing counterparties needed in payments, trade, and banking, the technology can slash financial services costs for consumers and enterprises alike by facilitating trusted, direct connectivity between transacting parties.
And as blockchain technology advances and unlocks new use cases, more and more countries will embrace . Besides the status quo, there is no alternative because blockchain is the next logical step in technological advancement. Governments will unequivocally have to experiment with it to stay relevant or risk missing out on the 4th Industrial Revolution, Web3 and the like.
8. Secondary Markets will see LP-led funds emerge, but limit transferability
2022 saw a 156% YoY growth in LP-led secondaries transaction volume (Source: Jefferies Global Secondary Market Review), and we are likely entering a new era. While we expect LP secondary transaction volument to grow exponentially, outsider access to the best funds will become highly restricted.
Conclusions and key takeaways
Don’t cut corners in compliance, or assume someone isn’t watching. Everyone in this space needs to understand the rules and regulations that protect investors, issuers, and intermediaries alike to grow the space responsibly.
Beyond 2023 digital securities will begin to be less and siloed. Having your RRSP app, crypto app, NFT wallet, startup shares all in different places… this will change in the near future.
Founders will realize that paying to acquire customers and paying to acquire investors don’t need to be different. Smart founders will strategically plan their raise rounds and put an “INVEST NOW” button right on their website and own those investors (vs. renting them temporarily from StartEngine or WeFunder)
The predicted recession (as always) will cause some belt-tightening - more so with VCs than retail investors. That might seem counterintuitive, but the LPs and VCs have been biding their time since Q2 of last year. They are planning on waiting it out. Founders need runway, and they’ll turn to retail investors and their fanbase to raise. So while VC moves will dip, we predict a smaller dip in ECF or a leveling off.
Digital currencies, coins, and tokens will all play a role in the Web3 revolution, and regulators are catching up
LP-led secondary market liquidity will continue it’s current growth trajectory, despite macroeconomic pressures