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Early-stage Investing - The Public gets a Seat at the Table


Traditionally, only a small group of investors, angel investors and other venture capitalists, have had access to investment opportunities in startups and growth companies. The public has been locked out from investing in startups. 

 

Investments in early-stage companies are typically high-risk. That is why early-stage investors typically invest in a portfolio of at least 10-20 companies. Those companies that are successful will realize exponential - ‘hockeystick’- growth and deliver huge returns for investors. The success of these companies can usually be attributed to the general public buying products and services from these companies. The same public that has had no access to investing in these companies and share in their success.


The Public Has Been Locked Out From Investing In Startups

 

Digital technology has been a significant enabler in creating online market places, such as Amazon and Shopify. These market places have dramatically increased access to products and services for every consumer and aggregated demand and supply supporting efficient price discovery that benefits all market participants. 

 

Why not apply the same digital technologies to connect private companies with the wider potential investor community supporting the entire process from discovery of investment opportunities to completion of investment transactions?

 

Welcome to the new venture capital market – The democratization of investing in early-stage companies where everyone, regardless of how deep their pockets are, can invest in companies they believe in. Investing online in private companies a.k.a. investment crowdfunding or equity crowdfunding. Anyone could become a shareholder of a company for minimum investment as low as $500, enabling the wider investor community to make multiple investments and diversify risk even with a relatively smaller sized investment portfolio.


Investment Crowdfunding Is Democratizing The Venture Capital Market


Investment crowdfunding offers early-stage companies the opportunity to raise capital from the public - The same public that may be the early (and future) customers of these emerging companies. With investment crowdfunding, the public has taken a seat at the early-stage investing table and brought a large pool of available capital.


Investment crowdfunding can also help address the challenge for early-stage companies to attract capital. Startup Genome published its Global Startup Ecosystem Report 2019 [2] on May 9th, ranking the top startup ecosystems in the world. No surprise Silicon Valley takes the first place. Toronto-Waterloo ranked 13th, up three spots from last year. 


Vancouver tumbled nine places from last year and ranked 24th. The report mentions that Vancouver as one of the top global ecosystems is hindered by a gap in early-stage funding, $320 million in the period 2016 to first half 2018 compared to the worldwide average of $1.1 billion. 


Montreal in 49th spot (down 15 places) $600 million went towards early-stage funding. However, even in the Toronto-Waterloo corridor, early-stage funding in startups is relatively low in comparison to its 13th place ranking with $1.4 billion in 2016 to H1 2018.


Canadian Startups Continue To Have A Lack Of Access To Venture Capital


Startup Genome ranked London (U.K.) as the 4th global ecosystem for early-stage funding with $4.3 billion in 2016 to H1 2018. EU-Startups highlights London’s exceptional access to venture capital funds, angel investors, crowdfunding platforms, banks and other financial possibilities.[3]

In the U.K., where investment crowdfunding has been around for nearly ten years, it has gone mainstream and is now an integral part of the startup funding ecosystem. 

 

We estimate that in Canada $2.5 billion per annum of total financial assets held by Canadians could be directed towards investments in early-stage companies. This figure is based on a conservative assumption that 1.8% of total financial assets would be directed towards investment in the private markets. $2.5 billion is a significant pool of capital in comparison to $162 million invested in Canadian startups by angel investor and $3.4 billion investments in Canadian startups and growth companies by venture capital and private equity firms in 2017. [1]

 

Investment Crowdfunding Could Unlock $2.5 Billion Per Year In Canada For In Early-Stage Companies


High growth entrepreneurship is key to Canada’s future economic success. Early stage companies drive innovation, economic growth, jobs and wealth creation. We need to help get these startups and growth companies to access the finance they need to grow and thrive. As we have seen in other countries like the U.K., investment crowdfunding can help expand the early-stage capital pool. Moreover, it goes further than helping early-stage companies get funding, investment crowdfunding also enables the public to share the risks and returns on venture capital investments jointly. 

 

Investment crowdfunding has the potential to unlock a large pool of capital from the public and empowers everyone to invest in companies they believe in and share risks plus returns. Also in Canada, investment crowdfunding is poised to become integral to the venture capital market. Together we can make that happen. 

 


[1]Statistics Canada (2019), Canadian Venture Capital Association, CVCA (2019), National Angel and Capital Organization Canada, NACO (2017), FrontFundr Team Analysis (2019)

[2]Startup Genome (2019),Global Startup Ecosystem Report 2019

[3]EU-Startups (2018),London’s startup ecosystem at a glance (November 20, 2018)


Peter-Paul Van Hoeken is founder and CEO of FrontFundr, a Canadian investment crowdfunding platform. Peter-Paul is the director of the Private Capital Markets Association Canada (PCMA) and advisor to the National Crowdfunding and Fintech Association Canada (NCFA).


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