Crowdfunding is a marketing vehicle. Sure, it’s a great way for entrepreneurs to raise money and a great way for investors to find institutional-quality deals. But above all Crowdfunding is about marketing. And that’s why financial firms – venture capital firms, investment banks, private equity firms, and others – are moving into the space.
When I was the director of a private equity firm, we spent our time doing what all investment firms do, working to broaden the firm’s investor base and find more and better deals. Because of the legal constraints that have been in place since the early 1930s, we (and everyone else) had to rely on private networks. While we developed a large private network, the process of manual network development is slow by design.
With the passage of the JOBS Act, everything has changed. Now, investment firms can take what was essentially a marketing function and move it online, using tools and marketing best practices to build their networks.
Today I run a public relations firm, Leverage PR, which works at the intersection of technology and finance. With my background Fin-Tech I’ve naturally gravitated to Crowdfunding and serve in leadership roles in the industry, including serving on the board of CFIRA, the leading trade association. From that vantage point I can see the trends in both technology and finance. Without doubt, one of the most pronounced trends is that financial firms are moving into Crowdfunding, with established players launching their own portals or partnering with others.
Here are the six leading factors encouraging financial firms to join the Crowd:
Reason #1: Adding to the Capital Stack – Raising money is hard. Even established firms with a base of institutional money need smaller investors to augment the capital stack or fill holes. If done properly, with the right public relations, launching a Crowdfunding platform is a wonderful way to get in front of new bases of potential investors and prove expertise in an industry.
Reason #2: Marketing Automation – Private equity has, by and large, stayed in the marketing Stone Age. Some of the biggest firms still use spreadsheets to track current investors and monitor prospective investors. In contrast, the best Crowdfunding platforms have embraced the power of marketing automation. They set up investors on drip marketing campaigns from the minute they sign up. They learn what each investor likes and doesn’t like using data from the site. They convert small investors into larger investors. They use technology to create the economies of scale that make dealing with smaller investors possible and profitable.
Reason #3: Improve and Automate Investor Relations – When many of us in private equity first heard of Crowdfunding we imagined a nightmare of dealing with hundreds of investors. The opposite is true. A Crowdfunding platform provides a better customer platform. In fact, we’re seeing established private equity firms launch portals solely for investor relations post close.
Reason #4: More and Better Deals – Early entrants into the space who are marketing their Crowdfunding portal are not only seeing a deeper and wider investor pool but are also seeing increased deal flow. Even if firms are launching only to do their own deals they are generating interest and traffic from other in their space who are bringing them deals.
Reason #5: Partnerships – Innovative companies are partnering with Crowdfunding platforms across a number of sectors to identify potential acquisition targets, effectively using the platforms as quasi-outsourced R&D. We believe this trend, already begun by firms like Healthios Exchange and CircleUp, will continue and intensify. R&D is expensive and risky. Crowdfunding offers a better and cheaper alternative.
Reason #6: Get Ahead of the Curve – Technology is changing everything and private equity is no exception. While we don’t know what private equity will look like in 10 years, we’re sure it will be online.
As we look forward to 2015, I’m excited about what lies ahead. While it’s true that the JOBS Act opened a world of opportunities for new, innovative players, it also gives established financial firms the tools to expand market reach, lower minimum investments, and bring technology to manual processes.
Joy Schoffler, principal of Leverage PR, is a nationally recognized author and speaker on financial services communications. An active member of the Crowdfunding community Joy sits on the board of CFIRA.org a leading Crowdfunding advocacy association. Before launching Leverage, Joy served as director of acquisitions for the Inc. award-winning private equity firm The PPA Group. Joy has written for a number of publications including Entrepreneur.com, Social Media Monthly and MarketingProfs. She is also a contributing author for the Wiley-published Bloomberg Media book “Crowdfunding: The Ultimate Guide to Raising Capital on the Internet.”