The $4T disruption: Why startup investing is up for a big change

In five years, we will no longer talk about crowdfunding versus traditional funding — it will all just be “funding.” Crowdfunding will be treated as a regular part of the private capital markets because it will co-exist with angel, VC, and private equity funding; it will also incorporate some of their their technologies and best practices.

We are already seeing this in the hybridization of early stage funding: Angels and other investors are looking at a founder’s ability to raise money online (either through product pre-sale or equity). Online raises are already becoming commonplace, and in the future investors will expect to see them as part of a healthy track record.

We’ve seen this same transition occur in other industries. Think back to the online advertising world 15 years ago — back when online advertising was just an experiment for “unsophisticated companies who didn’t really understand advertising” or “a flash in the pan.” The standard process of advertising was offline and institutional. Now we have a highly sophisticated global ecosystem of online/mobile advertising companies and technologies that have created hundreds of billions of dollars of value for both customers and investors in those technologies.

Likewise, a global ecosystem of equity and debt crowdfunding companies is now being created to enable the largest advance in the funding of early stage companies in 80 years. Debt-based crowdfunding (a.k.a. marketplace lending) has experienced explosive growth due to a number of factors, including a robust, standards-based infrastructure for evaluating these investments (e.g. FICO scores, credit histories). As new trust and transparency tools and data/analytics services are created for equity crowdfunding, we will see significant growth in this market as well.

I see tremendous investment opportunities to create powerful new services that will protect investors, increase transparency, and expand liquidity in early-stage investing. I agree with the Goldman Sachs estimate of a $4 trillion market disruption opportunity for the “Socialization of Finance”.

Some professional investors remain doubtful regarding this new world of online funding and its long-term viability. In response, I ask: Is it really possible that every other major industry in the world can be disrupted by the Internet, yet the private capital market, which has fueled all of this disruption, can itself remain untouched?

Jason W. Best is principal at Crowdfund Capital Advisors. The firm provides strategy and investment advisory services to professional investors, governments, innovators, and financial institutions. Jason also coauthored The World Bank’s Research on Crowdfunding and Crowdfund Investing for Dummies. You can follow him on Twitter @CrowdCapAdvisor.