Aside from lowering fee structures to disrupt an insider-controlled industry, you may be asking, “How is Crowdfunding related to the discount brokerage revolution in the 1970’s (~Schwab)?” To answer that question, let’s take a historical view of Schwab and how it impacted the financial services industry.
Schwab’s commitment to disrupting: Correlation to Crowdfunding, Moderate to Strong
Schwab was among the very first companies to launch discount stock trading in 1975. Schwab's willingness to disrupt the status quo changed the rules for the entire brokerage industry, making it more consumer-friendly by lowering the costs to trade stocks. Before laws changed in 1975 to allow discount commissions, brokers were a necessity for buying stocks. Schwab’s corporate mission statement of “you can do it yourself,” ultimately undercut the competition’s trading costs (traditional broker-dealers)by 30% or more.Similar to the legislation reshaping trading stocks in the 1970’s, the JOBS Act was also a watershed piece of legislation for investors seeking to invest in private equity at lower costs. Title’s II and V of the JOBS Act will increase the amounts of capital available to companies from non-traditional sources (~accredited investors) given the ability to generally solicit while remaining private up to 2,000 investors. Regardless of the outcome of Title III of the JOBS Act (Crowdfunding, non-accredited investors), the dam has been cracked impacting the establishment who have leveraged financial regulations to amass huge fees from investors and companies for over the past 70 years. Most would agree equity Crowdfunding, as postulated by the JOBS Act, is a platform that could positively impact private equity investing by lowering fees and increasing access to premium deal flow (i.e. why couldn’t I have invested in Google when they were private?). For market sectors with low-moderate capital requirements (~technology), real assets and yields (~real estate and energy), established fee structures are in the cross-hairs as evidenced by the proliferation of crowdfunding portals like Realty Mogul and FundersClub.For market sectors more capital-intensive (~Healthcare, Consumer Goods), Crowdfunding will be more additive than disruptive to ecosystem participants (Angel Groups, VC’s) placing a premium on partnering with incumbents (i.e. topping off VC rounds and introducing investors to Angel groups without geographical or participation limitations). In these sectors, the “continuum of capital” will be essential for bringing drugs and consumer goods to market. For example, It is doubtful in the near-term that Crowdfunding will be able to raise capital required of drug companies; average successful pharma company raises upwards of $50M in capital over six years.
Schwab’s commitment to innovating: Correlation to Crowdfunding, Strong
Schwab was a true innovator by offering cheap commissions, no-load mutual funds, and online trading as investors started to look for alternatives to high fees charged by brokers for these respective services. And Schwab continued to innovate throughout its history to meet investor demands. For example, Schwab's online trading model evolved as investors migrated from working in brokerage offices, to suburban office parks, to trading from home with strong broadband connections, and finally to mobile.
Furthermore, Schwab revolutionized the way mutual funds were priced and sold enabling investors to trade funds as easily as stocks via their One Source without paying the “load” to brokers. Through One Source, investors selected from a broad array of no-load funds sold in one marketplace with no fees while replacing the paperwork associated with investing in funds via brokers. Schwab didn’t stop there. The discount brokerage innovator became a low cost provider of “investment management” including “Managed
How Does Equity Crowdfunding Resemble the Discount Brokerage Revolution?
THE IMPLICATIONS FOR FUNDING PROMISING EMERGING GROWTH COMPANIES VIA CROWDFUNDING AS STATED IN FORBES:
“There are ~1.2MM households in the United States. Taking the top 1% (~12,000) and their average net worth ($15MM per household), if they invested .01% of their assets in Biotech, it would be 3x ($15MM) the amount funded from venture capitalists in 2013”
BRUCE BOOTH, PARTNER - ATLAS VENTURES