By Jason Frishman, CEO, Netcapital Funding Portal
In 1924, the modern Mutual Fund industry was born in Boston, with the introduction of The Massachusetts Investors Trust.
Nearly 100 years later, in 2016, Congress enacted the JOBS Act (Jumpstart our Business Startups), enabling the average investor to invest in private market companies for the first time under the oversight of the SEC’s Reg CF.
Each of these events represented a seminal moment in the democratization of investment opportunity. Prior to Mutual Funds, it was very difficult for average investors to afford a diversified portfolio of stocks. And prior to Reg CF, investing in private market securities was almost entirely restricted to connected, wealthy, “accredited” investors.
Our industry of investment portals is still in its infancy, just 6 years removed from the implementation of Reg CF. As we look ahead to the potential growth of our industry, it is helpful to look back at a comparative change with Mutual Funds. What drove success in the Mutual Fund industry was the ability to give retail investors a product that they could use to add diversification benefits and to lessen firm specific risks in public stocks, without paying high fees. Similarly, with Reg CF, retail investors can now invest in private companies with smaller investment amounts enabling them to add diversification with low or no fees by investing in higher risk private companies.
And similarly to investment portals, Mutual Funds were not an overnight success. Far from it, in fact. In the Roaring 20s, when the first Mutual Fund was invented, investors flocked to shares of individual stocks in the frothy markets instead of entertaining this newly created product called a Mutual Fund. These investors, who came in droves into stocks in the 20s, ultimately only added losses to the Crash of 1929 and ensuing Great Depression.
Slow and steady Mutual Funds, by comparison, fared somewhat better in this period and in time came to flourish. But it took time. Even under the legitimacy and regulatory oversight of the ’40 Act and the SEC, Mutual Funds did not become a generally accepted choice among retail investors for many decades.
According to the Investment Company Institute, in 1940, a full 16 years after the first Mutual Fund, total Mutual Fund assets had still not even reached $500M. It took another 6 years to cross the $1B mark in 1946, and the Mutual Fund industry did not cross $100B in total assets until 1980. That is well over 50 years after its inception.
Mutual Funds continued to face impediments to growth over this time period. Stock brokers, the primary source of fund distribution then, preferred the higher commissions earned on the sale of individual stocks rather than the single purchase of a Mutual Fund. But over time funds gained in popularity as dealers came to realize the advantages of offering clients professionally managed portfolios, relieving them of some of the liability of pushing clients into house-recommended stocks that could suddenly plummet in value.
Over time competition and market forces began to put downward pressure on commissions and other expenses, pushing Mutual Funds to become even more desirable in the eyes of traditional brokers and wealth managers.
And once the environment surrounding the market shifted towards acceptance of Mutual Funds as a strong and expected part of any retail investors portfolio, Mutual Funds began to dominate mind share. Growing to become the investment vehicle of choice for many investors’ retirement portfolios, total U.S.-registered Mutual Fund net assets had grown to $23.9 trillion in the year 2021, according to the Investment Company Institute.
Just as the Mutual Fund pioneers in the 1920s could not foresee how industry trends would evolve to enable their product to become the predominant choice for retail investors 100 years later, those of us in the investment portal industry today do not know what lies ahead for our businesses. But there are lessons we can take from the Mutual Fund experience.
First and foremost, building a successful industry takes hard work, patience and time.
Awareness of investment portals and Reg CF among the general public is still relatively low. Articles appear regularly in publications devoted to technology, startups and venture investing, but coverage in mainstream business publications is low.
Just as Mutual Funds offered investors an opportunity to build wealth through the long-term growth in capital markets, we know that early-stage investing, while risky, offers investors the opportunity to buy into companies that still have much of their growth ahead of them. Not all private companies will succeed, so investors should not put more into this asset class than they can afford to lose, but the hope is one big success can more than offset the losses in those that don’t make it.
We know investors are craving a means for diversification. We know investors want to invest in innovation and alternative investments. And we know from history that the environment will continue to evolve and change over time. We don’t know exactly what shape that change will take, but as an industry we need to continue to bring good products to market, make the investor experience as seamless as possible, and drive awareness and education. And so long as we combine that with the requisite patience, the time may come where Reg CF investments will be as ubiquitous as Mutual Fund investments.