by David Drake
Alternative finance is a collaborative funding model that represents the newest phenomenon in funding. With more than 1250 online crowdfunding platforms, alternative financing is breaking new ground, defying conventional financing methods with respect to how businesses raise capital, and taking the world by storm. Though primarily popular for Peer-to-Peer lending and crowdfunding, critical investment banking functions such as risk management, infrastructure and due diligence traverse both online and offline financial services. Some themes that underpin alternative finance include access to asset classes that were initially set aside for ultra-wealthy investors, and increased transparency, as well as a redefinition of who investors are across the whole spectrum of public and private asset classes. Alternative finance is also characterized by growth in the volume of funding activities within private assets and companies, and an increase in the number of companies that get funded, with target customers participating in product development or driving innovation in their investor role.
A rising star in the finance industry
Alternative finance has played a major role in integrating speed, data and technology which minimizes inefficiencies in identifying and accessing investment opportunities. It is a financing approach that has demonstrated the potential to shift how private companies raise funds by putting in place transparent, democratic and efficient processes for investors and entrepreneurs. Issuers benefit from the varied funding options provided by these crowdfunding platforms while minimizing the costs of these transactions.
Alternative finance is well known for its ability to remove information barriers and dispel inefficiencies associated with the private investment market. This fact alone opens up funding avenues and channels global equity. Even so, what makes alternative finance an even more disruptive innovation is the opportunity it creates for issuers to raise funds much faster and at lower costs when compared to traditional ways of raising capital. Alternative finance is continually offering issuers opportunities for increasing their customer loyalty and marketing awareness, which makes crowdfunding an attractive choice.
According to the Democratizing Finance report prepared by DealIndex, there is a growing institutional involvement in alternative finance, as more and more venture capitalists participate in crowdfunding activities. As tools for sophisticated investors continue to emerge, this interest among institutional investment is expected to strengthen even more. The major difference between alternative finance and open market finance models is that with alternative finance, companies do not have to limit themselves to specific limitations, rules or funding instruments. Instead, they are allowed to freely craft their offerings and empower the market to decide if their offerings are interesting.
Quantitative comparisons across traditional and alternative finance
Alternative finance has a huge market opportunity as the immediate addressable opportunity currently stands at 3.3 trillion dollars, compared to the already exploited early stage investing market of 300 billion dollars. In 2014, an estimated 65 billion dollars was added to the economy globally through crowdfunding, which came from a mix of both accredited and over 100 million unaccredited investors. Equity crowdfunding grew by 410% between 2012 and 2014, showing a 351% increase in quarterly revenue, and created an estimated 270,000 jobs in 2014 by crowdfunding alone. The average for the crowdfunding market is expected to surpass those of the angel and venture capital annual averages of 20 billion dollars and 30 billion dollars respectively, to raise over 34 billion dollars by the end of 2015.
For those who set up digital financing platforms, alternative finance allows them to gain knowledge about companies that have explored the process ahead of them. Companies that have ambitions for high growth learn how to interact with investors at an early stage as they go through the digital fundraising process. In Europe, alternative finance enables startups and entrepreneurs to access early stage capital through a more empowering and transparent space by engaging investors, venture capitalists and angel groups directly. This kind of efficiency, coupled with data that is generated by the digital market, leads to a faster learning process.
Key players in Alternative Finance
The crowdfunding industry currently has 1250 platforms through which investors and issuers interact. Some of the major crowdfunding players include EquityNet, a US-based crowdfunding platform, that provides issuers with tools for refining their offerings, analysis and business planning solutions, social platform integration methods and capabilities for sharing and hosting documents. MyMicroInvest is another Belgium-based alternative finance player that allows three kinds of investors, namely non-accredited investors, business angels and stylish investors, as well as venture capitalists. Another major alternative finance player is Onvest. A US-based platform, Onvest is democratizing private equity placement so that issuers can logon to the internet and share their fundraising ideas. The platform allows both accredited and non-accredited investors. Raizers, the lone French-based crowdfunding platform that has a European dimension, helps companies to raise between 50,000 and 1 million Euros. Like many crowdfunding platforms, Raizers incentivizes crowd investing after objectively reaching 30 percent of the financial target.
Crowdfunding, including real estate crowdfunding, is also one alternative finance method that is now trending not only the United States but globally. Times Realty News has prepared the 2016/2017 Real Estate Crowdfunding Report which contains this year’s emerging leaders in the space. The report promises a detailed analysis of platforms in the changing industry landscape. This is an essential resource if you are planning to invest in real estate together with the crowd.
The rising interest among institutional investors towards alternative finance is an indication that large financial companies will become more engaged in the sector going forward. Market lenders have paved the way through high level institutional involvement and mainstream investors such as mutual and pension funds appear to be keen on getting more involved in crowdfunding. Alternative finance is reaching a tipping point from which it will launch into a mainstream financing option. As a sector that has experienced less regulation, regulatory agencies will most likely be looking to tighten the grip in the coming years. Despite the challenges that will be experienced in the future, alternative finance is set to explode in growth rate and high value to become a foundation for Global Finance.