There are now more Google searches for alternative finance than there are for some of the country’s largest banks. Thanks to technology and a dismal bank lending climate post-2008 financial crisis, more and more business owners are increasingly opting for alternative financing measures by going online (hence our term “Digital Investing”). This begs the question, what exactly is Alternative Finance? Alternative Finance is an umbrella term covering a very diverse market containing different models. Crowdfunding and peer-to-peer lending are at the forefront of this movement and are quickly establishing themselves as the alternative to bank financing. Once just seen as a solution to the seed stage funding gap that developed during the financial criss, the ability of crowdfunding platforms to raise capital in a faster and more cost effective way has led a whole ecosystem of players who offer an online alternative to the traditional capital raising model.
While researching and analysing the key drivers underpinning the digital investment landscape, the DealIndex team uncovered a whole ecosystem of players that have transitioned into the online investment space. We realised that these players and how they interrelate with one another have not been covered before in a comprehensive manner. As such, we have attempted to capture the interlinkages between the swarm of players in the alternative finance space with the infographic below, which we have dubbed the “DI Sphere”.
The DI Sphere: a pictorial overview of the key players underpinning the alternative investment market
As a whole, these players are creating an integrated digital landscape that serves a specific economic need to fuel entrepreneurship: to provide capital to growing enterprises that lack access to capital under traditional financing methods and/or to provide capital to private companies in a more cost effective, transparent, and efficient way than traditionally provided. According to a Harvard Business School study last year, just 37 percent of small businesses applied for bank loans, and almost half of those – 43 percent – got less than what they requested, or nothing at all. Weeks of paperwork and waiting, wasting. In response to this frustration and rapid advancements in technology, alternative finance has emerged as a viable solution for such funding needs among small medium enterprises (SME’s).
Starting as a seed stage endeavour with reward-based platforms such as Indiegogo and Kickstarter, alternative finance has increasingly begun to move upstream with debt-based players Funding Circle and Lending Club now providing more loans to SME’s than ever before. Within the equity category, the majority of platforms are focused on early stage issuers, but even at this level there are a number of new investment models appearing. Syndicate Room and AngelList are examples of syndicate-led platforms where a lead investor must present their investment to other investors, while Venture Founders and OurCrowd bring a venture capital approach to crowdfunding. At the growth equity stage, platforms such as Offerboard allow more established companies the opportunity to raise larger amounts of capital.
Through their ability to access a large number of investors across differing regions, these platforms are allowing private companies to access both new sources of capital and traditional sources of capital more efficiently. Other traditional models that are being disrupted include; the private placement market, by companies such as Ace Portal and Venovate; the alternative asset investment market where platforms such as iCapital Network, Palico and Darc Matter are allowing investors to invest in Private Equity funds at much lower qualified amounts; and the online M&A market with platforms like DealGlobe, Exit Round, Banker Bay, and Deal Market, which work by bringing together deal makers across the globe.
A recent drawback of the alternative finance market and private company investment in general has been the inherent lack of liquidity for founders and investors in private companies. Nonetheless, this need is being addressed by players such as Asset Match, Liquity, Startup Stock Exchange, EquityZen and Secondmarket who provided liquidity for Facebook employees (pre-IPO). Taking a step away from the private investment market, another element of the digital investing ecosystem that is moving online is the wealth management industry, where Nutmeg and Wealthfront, who have amassed an AUM of USD 2.2 billion, are able to manage lower amounts of capital at a lower cost than traditional institutions.
To complement the wide array of investment platforms, a wider ecosystem of data providers, business intelligence, transaction, infrastructure and back office support providers has emerged and is vital for the ecosystem to effectively scale. In summary, the global financing landscape has made significant leaps and bounds since a decade ago with the emergence of alternative finance/digital investing. Alternative finance is removing information barriers and opening funding conduits in the private investment market for both issuers and investors, resulting in a more accessible asset class. Since its emergence, the type of issuers using online platforms has significantly moved upstream and the industry has the potential to significantly challenge the private company investment and lending market.
Stayed tuned for more in-depth research about the digital investment ecosystem. The DealIndex team constantly updates the DI-Sphere in conjunction with the changing Alternative Investment Landscape. Visit our Research page for more insights here DealIndex Research and Content by Deal Index Ltd. is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
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