SecondMarket announced a strategic partnership with CircleUp last week which comes on the tail of a similar partnership with Angellist in the Fall. Both partnerships —currently in beta— fall under the umbrella of SecondMarket+, an initiative that is selectively partnering with leading platforms to give SecondMarket investors centralized access to high-quality deal flow. Each entails cross-listing deal-flow on SecondMarket’s platform. (Selectively so by Angellist for now; I believe CircleUp will cross-list all deal-flow.)
I was surprised by the relatively quiet press response to the CircleUp announcement. The Angellist partnership was interesting. Perhaps I’m over-thinking it, but coupled with CircleUp, I believe we’re seeing the first strokes of a much larger picture being painted. One that I believe has big implications for the equity crowdfunding industry. CircleUp, by cross-listing their deal-flow on SecondMarket, is implicitly relinquishing a certain degree of control (read:ownership) over its community of accredited investors. The move indicates the acquisition of accredited investors is not CircleUp’s business; the curation of high-quality deal-flow, and subsequent acceleration through a value-added ecosystem, both pre and post-funding, is. The former of which is far more costly, and immediately less scalable, than the latter.
[Pause to recognize that CircleUp's model facilitates financial motivations. Introducing social motivations, i.e. biased affinities, geographies, etc., changes the dynamics.]
Let’s dive a bit deeper. In one future, let’s call it Future A, leading equity crowdfunding platforms invest significantly in building and cultivating proprietary communities of investors, positioning them as differentiating assets. The result? This asset —liquidity— would ostensibly persuade businesses to their platforms, as larger investor communities, and greater liquidity, would increase odds of funding success. In return, this would persuade additional investors; so on, and so forth.
But I think CircleUp sees a different future. Future B. And it’s positioning itself accordingly. Parenthetically, it’s much better for investors :-). Liquidity is centralized by trading platforms that have already expended huge sums of capital on building networks of accredited investors (accredited liquidity). For demonstrative purposes only, not representative of my thoughts on any individual company:
Of course, while SecondMarket is the first to publicly position itself as the face, or let’s say E*Trade, of accredited equity crowdfunding, others will, and are, invariably planning to be the Sharebuilder, Scottrade, and TradeKing. In time, these behemoths may come downstream themselves. Long-term, regulatory maturation —i.e. lifting the non-sensical Title III ban on secondary transactions in the first 12-months by non-accredited investors— could support incredibly robust democratized private equity markets, not unlike its public sibling.
This centralization of investors raises myriad strategic considerations for companies competing on the equity side of the industry, specifically those predominately marketing to financial motivations. I’ll conclude with one thought, and I’d love to hear yours: The “funding” in crowdfunding is a red herring.
I’m hosting a premium webinar in two weeks on the competitive dynamics of the investment crowdfunding industry. If interested, check it out here.