Impact of Crowdfunding on Investment Banking

Technology is opening up avenues that are unique. Certain areas which seemed out of the reach of Technology disruption have also come into its fold. Here we are talking about Investment Banking, which is likely to be impacted by a new phenomenon called Crowdfunding.

Crowd funding is expected to be a convenient way in which companies can raise funds from a number of people, who in turn get a share of equity in the company. The main feature of Crowdfunding is that the entire process of seeking funds and raising it via various retail investors happens online. Hence, the internet plays a pivotal role in Crowdfunding.    

Earlier the start-ups or new ventures would seek angel funding or money from Venture Capitalists in lieu of return on investment, but today these companies have warmed up to the idea of crowdfunding. When the entrepreneurs aren’t able to access these forms of financing, he may resort to crowdfunding which allows him to raise smaller bits of amounts from many sources with the promise of giving them equity holding.

The main idea behind Crowdfunding is to eliminate middlemen in the funding process and get straight access to the target market to seek funding for the business or project. The concept has surely gained popularity and it is likely to impact the investment banking functions in certain ways:

Here are some of the ways in which the Crowd Funding will be beneficial.

Speed of Transactions:

The very reason that Crowdfunding is an offshoot of technological advancement is reason enough to understand that the transactions will be executed at a drastic speed. The participants on both the sides are seeing much more rapid closure of the investment cycles. Direct investment through internet is making it possible to streamline the entire process and enhance its efficiency.

Reduced margins:

Due to crowd funding and the technological involvement, a lot of the tasks can be done by robots and machines. At present, the bankers at private investment banks charge a lot of fees of underwriting and conducting the entire deal. A rise in crowd funding can impact their work thus leaving them with reduced margins in their hands. With programmed software doing most of the work such as deal analysis, requirement matching and analysis of a company’s growth, clients will be not be willing to pay hefty fee to the bankers for their services.

Too many retail investors:

A good part about crowdfunding is that there is an opportunity for many investors to park their money in meaningful projects. Which means a lot of investors as opposed to a countable number of investment banks. Clients have more options and for the economy it means more capital formation. However, the catch here is that retail investors are considered emotional and are not objective enough in picking companies or projects. This could spoil the quality of deals being made in the industry.

More discipline:

As Crowdfunding is backed by technology, therefore access to any kind of information is just a click away. We live in an information-sharing economy and when the details of the company and investor is available, there is increased transparency. Not just this, it also ensures more accountability from the private company to the shareholders. Transparency and accountability automatically creates an atmosphere of discipline. This will also impact the Investment Banking sector in the positive way as a whole.

More power to Equity financing:

Debt is always a burden on the company and it was due to the lack of equity that companies had to resort to debt financing. Crowd funding has made up for that lacunae. There is more of Equity financing available hence, the liability side of the company reduces. There is no need to pledge company assets as collateral for bank for raising debt. This ushers a positive time for investment funding and more equity in a company motivates the company to grow. Equity Crowdfunding is all about taking more responsibility. The investor chooses the start-up and the company commits to work for its growth and reward the shareholders.

Can Crowd Funding and Investment Banking Co-exist

Experts opine that the Crowd funding and Investment Banking will eventually co-exist but there will surely be teething troubles. It is likely that both may come together in a phase of industry consolidation. Clearly, it is the case of more portals over people. The dealer-broker association will slowly fade away and there will a bunch of people who will be managing these portals. Gradually, even the financial regulators will launch regulatory guidelines for their operation.

Equity-based crowdfunding is still in its foundation stages. It has immense potential to cast an impact of the investment banking industry and the entire financial sector at large. If technology continues to evolve and the regulatory environment is in place, equity crowdfunding will influence the funding segment in a positive way.