Crowdfunding Fills Gap for Investors and Companies
NEW YORK ( TheStreet) -- Investors have struggled to generate steady returns in the public equity markets since the financial crisis began, with 28 negative months and only 32 positive months on the S&P 500 since October 2007.
And despite a U.S. economy that arguably has stabilized over the last 12 months (growth remains elusive), the equity market continues to be unpredictable. Austerity in Europe, elections in the U.S., and politics in the Middle East seem to drive sentiment far more than company fundamentals.
Investor anxiety in the public markets continues to push capital out of traditional equities. In fact, according to the Investment Company Institute, U.S. public equities saw a net outflow of approximately $77 billion in the first eight months of 2012.
Investors are increasingly hungry for alternative assets, particularly private investment opportunities.
Equity-based crowdfunding platforms like CircleUp allow individual investors to access high-growth private companies in ways never before possible. By lowering the minimum investment (often to $1,000), and by eliminating the need to network into deals (which often takes months), these platforms are expanding participation in early stage investing.
That disruptive innovation is exactly why so many registered investment advisers, family offices and investment funds are showing strong interest in equity-based crowdfunding.
>>Also see : 10 Niche Crowdfunding Sites: Which One Fits You? and After the Crowds Leave: Finding the Post-Kickstarter Ecosystem.
But I also strongly believe that equity-based crowdfunding results in adverse selection for some overfunded industries such as technology. Investors will find that equity-based crowdfunding only makes sense in certain industries. We think consumer packaged goods is a great example of an industry that makes sense for investors through an equity-based crowdfunding site. Here's why:
Asset-Light Business Models: Many consumer products businesses are simply marketing machines -- strong brands with practically no hard assets. A contract manufacturer produces and packages the products. A third-party sales team works with retail accounts to gain distribution (usually on commission). And an external logistics team manages the distribution of the products from the contract manufacturer to the customers.
As a result, these businesses often generate high return on invested capital and require limited funding once they get off the ground. They also don't usually require Series A, B, C, and D rounds before profitability. And, as outlined below, these companies simply need equity crowdfunding to help them take that first step.
Because less money is needed in subsequent rounds, there will be less dilution for you, the investor.Inefficient Market: Small consumer products businesses are not sexy. At least not in the way that knocks down the doors of Silicon Valley's venture capitalists. "Software as a service" (whatever that means) is all the rage in start-up land these days -- and for good reason, given the performance of businesses like Workday in the initial public offering market. But natural granola bars (I understand those) don't get much attention.