VC investment slowdown: an important test for equity crowdfunding — Christian Catalini

MIT Sloan Professor Christian Catalini

MIT Sloan Professor Christian Catalini

From The PE Hub Network

In 2015, venture capitalists invested $58.8 billion in the United States, topping the figures for the previous two years by a substantial margin. In 2016 investors have been substantially more cautious, and if the current slowdown is a course correction rather than a blip, it will also be an important test for the nascent equity crowdfunding market.

Many equity crowdfunding platforms have sprung up, including AngelList, FundersClub, Wefunder, OurCrowd andSyndicateRoom.

To succeed, these two-sided markets need enough good investors to be attractive for entrepreneurs to post their ventures, and enough high-quality ventures to be worthwhile for investors to spend time and capital on them. If early-stage capital becomes tougher to obtain, only platforms that are surfacing high-quality deals and matching them efficiently will be able to keep growing.

Lead-Crowd Syndication

A particularly interesting feature within the equity-crowdfunding world involves syndication between the crowd and a lead investor. Platforms that have introduced syndication, like AngelList and SyndicateRoom, have done it to address the problem of information asymmetry.

Traditionally, evaluating a startup online is difficult. First-time entrepreneurs, unlike Uber drivers or Amazon products, do not come with ratings or reviews. Moreover, investors seeking to invest $1,000 per deal have little incentive to spend time and effort to conduct due diligence on each startup they select online.

Syndication solves this issue by relying on professional investors who act as leaders for smaller investors to follow.

Read the full post at The PE Hub Network

Christian Catalini is the Fred Kayne (1960) Career Development Professor of Entrepreneurship and Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management.

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