The market value of the Alternative Investment Market (Aim) shrank by more than £2bn in a month as more companies opted to raise capital through crowdfunding.
Figures show the value of the Aim dropped to £80.8bn at the end of October, from the £83bn posted on 30 September.
According to figures from Fundamental Asset Management, which specialises in Aim investments, the number of listed companies fell to 995 last month, which is the first time in 12 years this figure has dropped below 1,000.
Chris Boxall, co-founder at Fundamental, said it seemed crowdfunding platforms offer a more viable funding route for very small, earlier stage companies which need smaller amounts of capital.
He said: “Smaller companies may have previously chosen the Aim, but it’s much less expensive and far quicker for them to simply go to the crowd for money.”
Yet he said the concern from a crowdfunding perspective is that many of the crowdfunders appear to be less concerned about valuation, meaning many early stage businesses on the crowdfunding sites are raising money at relatively high valuations.
“This could cause problems in the future as early stage crowdfunders are massively diluted in future funding rounds or see little in the way of long-term return.”
Earlier this year, Sharesoc called for a reformation of the Aim market to improve the quality of listed companies as it looked to prevent investors losing money.
Seven companies departed from the Aim market last month, including Pinewood Group which was the subject of a takeover and Secure Trust Bank which moved to the main market.
While two larger companies became listed, including Premier Asset Management and Van Elle Holdings.
Mr Boxall said Aim is now becoming a destination for larger businesses where family or private equity owners might be looking for a partial exit.
Scott Gallacher, chartered financial planner at Rowley Turton, said: "The move away from Aim to crowdfunding is naturally a new phenomenon, and one that is no doubt attractive for the firm seeking investment.
"I’m not an expert on crowdfunding but it does raise some concerns with me as to whether there is sufficient due diligence and safeguards under crowdfunding to protect investors."