Some industry experts perceive raising capital online as a last resort tool for fund managers or private issuers, that utilizing digital channels is somehow an illegitimate way to fundraise and can actually cause harmful reputation risk. So what exactly is the traditional way of raising capital in the private capital markets?
The Traditional Way of Raising Capital in the Private Capital Markets
Before the lifting of the ban on general solicitation, private issuers and fund managers could only solicit capital from individuals or institutions with whom they had a previous meaningful relationship. This was meant to reduce fraud, but in turn created an opaque and closed-door system where only the wealthy could access the best deals. The accreditation standard was put in place to prevent issuers from selling securities to unqualified investors, either in sophistication or wealth. The idea is that if you are an accredited investor, you can put money in risky assets and potentially lose it all without incurring severe economic hardship. Also, accredited investors in theory should be more familiar with sophisticated investment techniques. The ban on advertising private securities was originally meant to thwart scams, but with the rise of communications technology this ban was beginning to look less justified. Digital communication makes forming connections ubiquitous and cheap. Raising capital the traditional way presents its own distinct costs, which might actually outweigh raising capital through technology. For example, in order to have a pre-existing relationship with investors, issuers attend conferences and cap-intro events at a premium price to potentially form investor relationships. Old habits die hard, and the traditional ways of doing business sometimes stay the same not out of efficiency or best practices, but out of an industry’s resistance to change.
The Difference Between Crowdfunding and Raising Private Capital Online
We should make some distinctions between crowdfunding and raising capital online because they are perceived and treated much differently. Traditional crowdfunding platforms like Kickstarter and Indiegogo have donations-based fundraising models. It could be perceived that if a for-profit business is raising money and soliciting donations on one of these sites that it is in desperate need of support. This is perfectly understandable. With some exceptions, established companies typically don’t raise money through donations. Firms throughout their lifecycles do need capital to survive, and this is obtained by selling equity or raising debt financing. The need for capital is not a sign of weakness, but a sign of growth. There are different tools a company can use to raise capital including digital channels. Why not use every tool in your arsenal to help your firm get to the next level?
Why Fund Managers Should Consider Raising Capital Online
Of course there are digital channels that specialize in different types of offerings and cater to different types of investors. Generally for an issuer, it’s just smart business to utilize digital distribution given its low cost, high efficiency, and potential for high reward. As mentioned above, in the past, personal relationships had to be utilized to raise private capital. As technology developed, digital distribution made it possible to connect with investors globally. The economics make sense too. Cap intro, travel, and other costs associated with raising capital can run managers tens or hundreds of thousands of dollars a month. Soliciting a few investors through digital channels can save a firm significant time and money, and open up a completely different network of investors. Connecting with one family office through technology for example, can spur a long-lasting relationship and potential access to significant capital. The antiquated techniques will be left to the traditionalists and firms that thrive on the old ways of doing business. As digital access to private investment opportunities begin to see mass adoption, the industry will become more transparent and efficient. Additionally, many companies that were passed over by traditional private investors, will have an opportunity to tap into a different investor base that could be more willing to invest in innovation or a special cause, given their willingness to be early adopters to online investing.
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