The power of the crowd when raising capital in the digital age

Bohemian Rhapsody by Queen is one of the most iconic songs of all time but many are unaware that this masterpiece almost missed its opportunity to become such an intrinsic part of pop culture. The track was first played to Roy Featherstone, the former chief of EMI, who decided it lacked mass appeal.

Unfazed by this apathetic reception, Freddie Mercury took the track to a radio DJ in London, who played the song 14 times to listeners who simply couldn’t get enough of it.

The rest – as they say – is history.

The music industry has evolved significantly since then. The digitisation of the entertainment sector now gives emerging artists immediate global exposure to the true universe of potential fans, bypassing the Featherstones of the world and going directly to the crowd, to the consumer. Many artists have since been discovered like this, including Adele, Justin Beiber and DJ Calvin Harris, and the music world is richer for it.

The wisdom of the crowd has led to many great discoveries in music, film, television, healthcare and finance. And it’s happening now in the venture capital market too.

The problem with private capital markets

Sometimes you’ll hear people in the industry say, “The best companies always get funded.” That is a complete fallacy. History is littered with examples of companies with massive potential that were rejected, ignored, or simply missed by traditional private capital market investors.

Private capital markets are:

• Highly fragmented- There are so many different sources of potential capital, including accelerators, individual angel investors, private syndicates, angel groups, venture capital funds, family offices and corporate venture capital arms. Within each of those categories, many participants are spread across an even greater number of locations.
• Lack of transparency – Once you work out who to speak to, you’ll need to work out the rules of engagement for each group which will have its own mandate, processes and preferences, all of which are completely understandable but very difficult for founders to navigate.
• Difficult to access – Do you have access to all the right people? Do your advisers? Who are the right people anyway?
• Lack diversity and are rife with unconscious bias – If you’re an introvert or a minority or otherwise don’t fit some obscure mould of what a successful founder should be, the entire process can be even more difficult.

The reality is, sometimes, the deal just doesn’t fit with the investor’s mandate, or appetite or interests, or the status of their fund at the time. But trying to gaslight founders into thinking all great companies get funded is unhelpful. It is just not true. The evidence simply does not support it.

So we need to have an honest conversation about the flaws in the private capital markets if we’re serious about fixing them. It needs to be easier for founders to raise capital quickly and flexibly, and one way to do that is to open the private capital markets up to as many people as possible and give everybody digital access to back what they believe in.

The digital venture capital revolution

Digital venture capital is the facilitation of the entire capital raising process completely online, accessible by all types of investors from anywhere in the world, in whatever way and in whatever amounts suit them best.

It facilitates everything from opportunity awareness, investor education, nurturing and acquisition, all of the complex legal and financial services compliance aspects, through to investment due diligence, transaction execution, and the collection and deployment of investment capital, all done online.

For founders, it makes it easier and faster to raise your next round of capital, or a bridging round, or issue corporate debt, or any number of other potential capital strategies you almost certainly will need as your business grows.

The next phase will include Web3 tools, such as the application of tokenisation and distributed ledger technology. By the end of the year, founders will be able to:

• Transition from spreadsheet-based Cap Tables to digital share registries recorded on the blockchain with all of the benefits distributed ledger technology brings – low transaction costs, high transaction speeds, complete transparency, the immutability of data, and enhanced cybersecurity.
• Tokenise their securities and, by doing that, facilitate what we call always-on capital raising, allowing you to plug cashflow gaps or raise a bridging round when you need it.
• And finally, founders, employees and shareholders will be able to cash out at any time on a blockchain-based secondary trading platform, giving all parties flexible liquidity without the need for a merger, acquisition or a traditional IPO.

So now, in addition to all of the traditional sources of private capital, founders have access to the crowd and can raise capital from it whenever they want without the usual constraints that apply to more traditional and highly structured capital-raising rounds.

In the UK last year, over 30 per cent of all venture capital funding was invested digitally by tens of thousands of individuals, and that growth shows no signs of slowing down.

So as companies begin to plan their capital strategies for the coming year, it is critical, in my view, that founders, directors and their advisers understand how to raise capital in a digital environment and are building that into their capital-raising strategy because if you’re not, you are absolutely leaving money on the table.

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