The new age in corporations: equity crowdfunding and more.​

Published on: 17 Feb 2018

With new technologies looping around the corner, businesses are facing a hard truth to cope with: what was for granted in the last century is obsolete in this one. The grocer who relied on constant revenues from returning clients suddenly started feeling the pressure of low revenues at the end of the month; the carpenter saw his shop less and less crowded; the retailer is going through the worst times of its existence. Just last month, Warren Buffet, sold his 900 Million Dollars stake in Walmart declaring the end of major retail chains, yet another screw in its coffin. Another major trend is the rise of technology companies following the 2008 economic crisis that saw huge companies going bankrupt and the financial system collapsing to its knees marking the end of conventional business dealings even if we did not realize it yet. Indeed new projects are not being funded the same way as they did before and banks are rapidly losing their position as a centerpiece in the business equation, being replaced by venture capital funding, angel investors, and another peer to peer lending and/or capital injection.

The US government led the way into regulating this market through Title II and III of the JOBS act and regulation A+, a sign that things are moving towards online offerings and there is no going back. Entrepreneurs are still reluctant on using equity crowdfunding but numbers are increasing rapidly. In the MENA, Eureeca, and Liwwaa are already leading the way into this era. So for those of you wondering how it functions it is quite simple yet still hides many technical obstacles. A company is looking to raise capital and it does not want to go to a VC or an angel or even a financial institution, in that case, it can just go to the public, present its project and get the funding it requires to jumpstart its business. This could go even further making it possible to get equity crowdfunded upon inception to the level of 10% per se enabling anyone to go to the public and get 10% worth of equity and start their business wherever and whenever they want.

Nevertheless, equity crowdfunding will start by being more of an online market investing model where individual investors, institutions, and private equity firms dig in to add value added projects to their portfolios, and it is crucial to note that this will disrupt the private equity sector as a start far more than capital markets or other major hubs for capital flows.

This transition won’t be painless. As we’ve seen in the past, offline intermediaries tend not to do well when faced with competition from online marketplaces. Think retail (Amazon), transportation (Uber), hospitality (Airbnb). Technology forces the best legacy players to differentiate themselves from the new better, faster, cheaper alternatives while squeezing out the intermediaries that can’t innovate. Private equity will be no different. 

Here’s another prediction: The fees charged by private equity firms will go down because of marketplace investing. That’s an easy one — just look at the analog in public markets. In the past 40 years, fees have gone down 70 - 90 percent for public market investors, driven by new technologies and marketplaces. Fees haven’t changed at all in private equity — for decades. Today there is no product more expensive in all of the financial services than the private equity fund that gobbles a 2-3 percent annual management fee and 20-30 percent of profits.  

Moving away from equity crowdfunding, many practices are disrupting corporations amongst which new clauses in shareholders agreements, to new hierarchical systems, to new processes in operating a business. A corporation is becoming a flexible tool that you can incorporate anywhere around the world and its identity and credibility are relying more and more on its actual operations, branding and cap table, than on its registration and legal structure. Furthermore, corporations are witnessing a huge disruption in the way they are being managed or actually unmanaged by people. Artificial intelligence coupled with Blockchain are making it possible to hire a software that will manage a company in its technical aspect from A to Z without coming back to shareholders or the board of directors except if there are major decisions to be taken within the company. This system will enable companies to become automatic money generating tools compiling all the best practices adapted to a certain industry, market, and clientele to produce the best business strategy out there. A question remains: What if several companies were managed by software?

Today, founders have several options to choose from in equity crowdfunding. I believe the industry in the U.S. will continue to grow as the $20 Billion angel market, the $50 Billion venture capital market, and the $1.2 Trillion overall private placements market continue to shift towards online models of distribution. And entrepreneurs fundraising will have more options and paths to capital than they’ve ever had. 

Moreover, corporations are becoming much easier to incorporate and operate with so many funding options to choose from and so many agile processes to choose from in managing the business.

It’s a great time to be an entrepreneur.