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Crowdfunding for the Institutional Set

The need for new forms of financing that spawned mass-audience crowdfunding operations like Kickstarter is evident in “crowd investing” platforms like Nicola Horlick's Money&Co.

What is the easiest way to raise thousands of dollars, or even a million, to open a restaurant, produce a film or benefit a charitable cause? All the current buzz points to crowdfunding. It’s friends-and-family financing for the Facebook age. Post project details on a website built for the purpose, offer contributors some eventual perks or returns on promised success, and wait for the money to roll in.

That’s essentially the Kickstarter story. The pioneering, mass-audience intermediary has funded 55,000 projects since its 2009 launch, and total pledges are approaching $1 billion. There are dozens of sites worldwide that do what Kickstarter does, including GoFundMe and Indiegogo, and more and more variations on the theme are emerging. As with many things Internet, the market is diversifying and fragmenting to serve specific creative niches (music or movies), business lines (peer-to-peer lending or project finance) and classes of investors.

In the latter category are Seedrs in the U.K., which aims to bring venture capital opportunities within the reach of individual investors, and MicroVentures, an Austin, Texas–based firm that describes itself as a “crowdfunded investment bank” and its mission as “connecting angel investors and start-ups.”

Here the mass-market, Kickstarter-type phenomenon crosses over into more conventional, even institutional, investment territory, where investor suitability and accreditation come into play. At the same time, pending provisions of the U.S. Jumpstart Our Business Startups Act are expected to lower barriers to equity and debt raising and give the start-up sector — not to mention crowdfunding entities — a shot in the arm.

Crowdfunding is not yet crowding out angels, venture capitalists and small-business bankers, but neither is the model’s disruptive potential lost on any of them. Veteran U.K. money manager Nicola Horlick has jumped on the bandwagon as CEO of Money&Co, a soon-to-be-launched crowd-lender to small and medium-size enterprises. Horlick raised £150,000 ($246,000) last year on Seedrs for Glentham Capital, a film-financing fund that she chairs, giving investors 10 percent ownership. The experience "confirmed her view that crowd funding is going to be an important force in the financial world going forward," says the Money&Co website, which also points out that U.K. bank lending has been declining since 2009.

In yet another institutional-flavored twist, two firms with very different backgrounds are assembling portfolios for investors seeking to spread their bets and risks. These “crowdfund managers” are I-Bankers Securities, an 18-year-old boutique investment bank with offices in Los Angeles, New York and Lugano, Switzerland; and Wefunder, a two-year-old venture with a presence in the Boston- and San Francisco–area high-tech hotbeds. Both operate online platforms displaying prospective investments to their respective crowds, I-Bankers through an affiliate launched in December 2012, I-Bankers Direct. Both have begun marketing diversified portfolios of investments they have vetted.

Although I-Bankers Direct has used the promotional tagline “serious crowdfunding for serious investors,” co-founder John Kallassy calls it “a crowd investing platform.” He adds, “Our differentiator is vetting and due diligence” — which are not hallmarks of mass crowdfunding. “We apply years of banking and entrepreneurial experience,” he explains. “We are a broker-dealer, which sets high standards to live by.”

Wefunder president and co-founder Mike Norman similarly prefers “crowd investing” to describe this “segment of crowdfunding.” However, he argues that Wefunder’s advantage is “being from the start-up community” and bringing a different perspective than do banks and broker-dealers.

Norman also knows the JOBS Act better than most: Wefunder was organized specifically to capitalize on it, and Norman spent so much time in Washington lobbying to shape the 2012 legislation that news site Betabeat called Wefunder “the guys who brought you the JOBS Act.”

Ultimately, the realities of capital markets will rule the day, and there could be plenty of winners. “Dozens are trying to get into this space,” Norman observes. “The question is, who has the deal flow and liquidity to put to work?”

Among those eyeing crowdfunding with interest, and who have access to capital and liquidity, are investors in the financial technology sector but not necessarily in the Kickstarters and Seedrs. The fintech-focused merchant bank SenaHill Partners, for instance, has a stake in private placement and crowdfunding platform operator WealthForge.

“This business needs infrastructure,” states SenaHill managing partner Justin Brownhill. “And our bet is there and on the back end.” • •

Jeffrey Kutler is editor-in-chief of Risk Professional magazine, published by the Global Association of Risk Professionals.

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