February 3, 2017

By Grant Harvey

TechBullion: Crowdfunding Grows Up as VC Declines

This week, TechBullion writer Angela Scott-Briggs dug into the correlation between the decline of VC activity and the rise of equity crowdfunding. Since this is a big topic of discussion for those in the crowdfunding industry, I decided to dig in and review what they put together.

There has been a considerable amount of hype around the potential for equity crowdfunding in the US, peaking around the launch of Title IV back in June of 2015 and more recently around the launch of Title III in May of last year. Early data on the use of both of those regulations has been less exciting than many predicted, and it’s clear that US crowdfunding still has a way to go. But global crowdfunding, led valiantly by the UK (Brexit be damned) actually surpassed venture capital funding for smaller companies way back in 2015.

According to a new report from KPMG about the venture landscape in 2016, Scott-Briggs cites global VC activity declined by almost 25% from 2015, with 13,665 deals raising about $127.4 billion. In 2015, those numbers were 17,992 global VC deals with a value of $141 billion. Between April 2015 and April 2016, the US in particular saw a 30% decline in total deployed capital from VCs and a 22% drop in VC deal volume, a trend highlighted by the fourth quarter of 2015 seeing the dedication of only $11.3 billion (32% decline from Q3) towards 960 deals (a 16% decline from Q3). By the end of the first quarter of 2016, VC funding across all U.S. startups was only $13.9 billion – a 25% decline from the year prior.

Based on the preliminary data Briggs-Scott has coming out of Europe, the EU didn’t fare much better, with the third quarter of 2016 seeing a sharp decline in European venture capital and total investments in European startups down by over one third in the second quarter compared to the same period in 2015. Scott Briggs goes on to source data from a report by Dow Jones VentureSource reporting 464 deals amounting to €2.1 billion raised by European companies from VC funds in the third quarter of 2016, a 32% decline from Q2 and 39% lower than Q3 2015.

Scott-Briggs’ last source concluded that early stage investing in Indian startups from VC firms saw a uniquely significant drop, with Venture Intelligence reporting VC firms making only 405 investments worth $1.4 billion in 2016 compared to 512 deals worth $2 billion from 2015 – a 21% overall drop in volume and 27% drop in deployed capital. Perhaps that fact had some sway over OurCrowd’s CEO Jon Medved when he announced his plan to invest approximately $30 million in Indian startups this week?

Scott-Briggs ended her piece by citing Jeffrey Grabow of auditing firm Ernst & Young in a recent VentureBeat article and his predictions that venture funding will only continue to decrease, citing data from the Silicon Valley Bank that VC funding will top out at $25 billion in 2017, or 38% lower than 2016. Going on, Grabow added, “There are several reasons for this decline. Chief among them is the need for the market to absorb the capital that has been deployed. Momentum capital rushed into the later stage of the venture pipeline and was invested in pretty much all available opportunities. It’s time to see how those bets play out.”

So if VCs, who have been the traditional gatekeepers (and particularly picky anyway), are slowing down their startup funding, then it makes sense for disruptive online technologies to swoop in and help founders get the funding they need, right? Not to mention founders can offer up less of their company and focus less on a massive exit like they do when dealing with VCs. But this has been the rallying cry of equity crowdfunding all along. So, what’s the big take away?

I think the question to ask is how will all of these elements come together. Obviously venture capital firms aren’t going away, and obviously crowdfunding will not be the way we all finance our ventures in the future. VC firms have been taking a wait-and-see approach to crowdfunding, in particular due to the stigma of using crowdfunding as an alternative because you can’t attract real VCs. But if crowdfunding’s success attracts better deals and more crowdfunding funds open up in the US like those opening up abroad (particularly in the UK), it’s safe to predict VC funding may make a comeback by way of crowdfunding – not be replaced by it.

What do you think? Email me your thoughts: grant@dealflow.com