The COVID-19 pandemic has had a distinct impact on investing. Many people began participating more in the stock market, but the private markets were also affected. Venture capitalists (VCs) had to change how they vetted potential investments as they were unable to meet face-to-face with founders for much of the year. The online private markets also saw a major increase in activity, both in the number of companies raising funds and the number of investors participating in rounds. So how did investments in early stage companies in the online private markets compare to traditional VC in 2020? That’s the question this Chart of the Week intends to answer.
We used a Crunchbase article to get the funding data for seed and angel investments (what we’d define as “early”) from VC. For the online private markets, we used our own data. Additionally, we’re comparing the same time frame outlined in the Crunchbase article — 2020 funding data up to the first quarter of 2021. Lastly, we decided to track the quarter-to-quarter change for both VC and equity crowdfunding. This comparison allows us to focus on the growth (or lack thereof) in each market, which is a better indicator of activity and potential than simply comparing the size of investments.
VC funding slowed steadily throughout 2020. It fell steeply in the second quarter of 2020, which makes sense in context of the pandemic. However, VC’s recovery after that drop-off was limited, and overall funding decreased again at the beginning of 2021. For companies in the online private markets, funding slowed during much of 2020 as well. However, the change in online investments was never as weak as VC investments. Furthermore, crowdfunding investments dramatically increased from the fourth quarter of 2021 to the first quarter of 2021 — nearly 80% higher overall. Some of that amazing growth can likely be attributed to the SEC increasing the Regulation Crowdfunding limit from $1.07 million to $5 million.
While equity crowdfunding is quite small (in investment amount) compared to VC funding, the optimism and continued growth around equity crowdfunding is very encouraging. It demonstrates that this promising asset class — which was once unavailable to the majority of retail investors — is becoming larger and more accessible. And online crowdfunding — as opposed to traditional VC methods of vetting investments — isn’t going anywhere. The pandemic has shifted education, events, healthcare, and more to a virtual format (or accelerated an existing virtual trend). Investors are likely to continue seeking out opportunities online as well. As both old and new generations of investors hunt for exciting new investment opportunities, they’ll likely continue to flock to the online private markets.
Wall Street has Morningstar, S&P, and Bloomberg
The equity crowdfunding market has KingsCrowd.
About: Francis Vu
An investment professional with a background in private equity and venture capital having spent time conducting investments at VU Venture Partners and Pacific Oak LLC with a finance and management degree from Tulane University.