The Future of Equity Crowdfunding: Top 3 Predictions for 2024

Equity crowdfunding, a dynamic segment of the financial world, has evolved remarkably since its inception. This innovative fundraising avenue has enabled startups and early-stage companies to access capital from a broad pool of investors. As we look towards 2024, the equity crowdfunding landscape is poised for significant changes. Once skeptical, I now find myself leaning towards a more bullish outlook, predicting transformative shifts that could redefine this sector. Here, we delve into three key predictions that are set to shape the future of equity crowdfunding.

Prediction 1: The Rise of Debt Crowdfunding

The first major shift we anticipate is the increasing prevalence of 'debt' crowdfunding on equity platforms, with a specific focus on revenue-based financing (RBF). RBF presents a more lucid return path for non-professional investors and is an ideal tool for early-stage businesses in need of $50-250k growth capital. This model allows investors to receive a percentage of ongoing gross revenues, providing a clear exit strategy, which is often a grey area in traditional equity crowdfunding.

In the short term, platforms might experience a dip in revenue, as RBF deals are typically smaller. However, their long-term gain is undeniable. More success stories from businesses thriving through RBF will likely lead to increased transaction volume and investor trust.

Who Wins/Loses: Initially, platforms may grapple with reduced revenue and investor skepticism. However, investors stand to gain with clearer returns. Over time, platforms will benefit from a higher success rate, enhancing their reputation and attracting more businesses and investors.

Prediction 2: Emergence of Independent Research Shops

The second prediction is the emergence of independent research shops dedicated to equity crowdfunding. Traditional equity research has always struggled with profitability, as getting investors to pay for research is challenging. However, the equity crowdfunding landscape is ripe for a change.

We foresee a subscription-based model for equity crowdfunding research, tailored to the needs of time-constrained, non-professional investors. This model could range from $9-99 per month, offering varying levels of access, from basic read-only reports to in-depth financial models and return analyses.

In the short run, companies accustomed to raising capital at inflated valuations may find this new transparency challenging. However, in the long term, the availability of independent, high-quality research will likely result in better-informed investment decisions.

Who Wins/Loses: Initially, platforms and companies with high valuations may see a downturn. However, investors will benefit from better investment insights. In the long term, platforms and companies will gain from a more educated investor base, leading to more successful funding rounds.

Prediction 3: A Shift Towards Priced Equity Deals

The third significant shift we predict is a movement back to priced equity deals, moving away from the currently popular Simple Agreement for Future Equity (SAFE) model. SAFEs, while innovative, often serve as a temporary solution, deferring valuation and investment terms to future funding rounds. They are best suited for companies likely to raise significant venture capital in the future.

A telling example is a company raising funds on a well-known equity crowdfunding platform using a SAFE. When questioned about investor liquidity, their response highlighted a plan to pay dividends upon profitability by 2025. While dividends are appealing to equity investors, they do not align well with the interests of SAFE holders.

Who Wins/Loses: In the short term, platforms heavily invested in SAFEs might face challenges adapting to this shift. However, investors stand to benefit from more transparent and straightforward investment terms. Founders, too, will gain a better understanding of their capital structure. Ultimately, this shift will lead to a healthier, more sustainable crowdfunding ecosystem.

Conclusion

As we look towards 2024, these three key trends – the rise of debt crowdfunding, the emergence of independent research, and the shift back to priced equity deals – are set to redefine the landscape of equity crowdfunding. This evolution bodes well for investors seeking clarity and better investment opportunities. For platforms and businesses, adapting to these changes will be crucial for long-term success. The future of equity crowdfunding appears promising and primed for growth and innovation.