Crowdfunding is growing at an unprecedented rate and impacting government policies, influencing enterprise innovation, and changing the role of financial institutions worldwide. Just five years ago crowdfunding reported $880 million in 2010, indicating a relatively small market with minimal growth potential.
However, the recent crowdfunding industry figures illustrate rampant growth, as reported by Massolution in their 2015 Crowdfunding Industry Report, revealing $16.2 billion was crowdfunded in 2014 and $34.4 billion is forecasted for 2015. If the trend of doubling year over year continues, we’ll see $90 billion by 2017.
Today’s digital world has opened the door for finance and the collaborative economy to meet and drive growth and change in the industry. The collaborative economy has introduced new disruptive models to industries like real estate and transportation with the likes of Airbnb and Uber, and now it’s disrupting .
Crowdfunding continues to catch on with an increasing number of businesses and individuals. Factors like convenience, flexibility, lower risk, and building up a community of fans and supporters make crowdfunding very attractive for those seeking to raise relatively small amounts of money quickly. The challenges often faced by entrepreneurs when approaching banks to finance new ventures has also driven the continual growth of crowdfunding as they seek new ways to raise funds.
By offering interest rates that are more appealing than those offered by most major banks, the amount of loans issued through marketplace lenders – also known as debt crowdfunding – is expected to grow from $23 billion in the U.S. and $33 billion in China in 2015 to $122 billion and $128 billion respectively by 2020.
Although the first known instance took place in 1997, crowdfunding has continually evolved over time and diversified into several different types. While most of us might typically think of charity fundraising or alternative financing for personal or business loans, there are other forms of crowdfunding that are gaining momentum.
Equity crowdfunding allows broad groups of investors to fund startup companies and small businesses in exchange for equity, or shares of ownership. Due to the potential level of risk involved and the lack of regulation in many jurisdictions, the level of investment is usually fairly small compared with more conventional forms of raising . Some examples of equity crowdfunding platforms include CircleUp, AppVested, SeedsUp, and CloudFund.
However, equity crowdfunding has gained considerable ground in the United States after the Jumpstart Our Business Startups (JOBS) Act was passed by President Barack Obama in 2012. Under Title II of the JOBS Act, which came into force in September 2013, nearly $220 million in capital was raised through equity crowdfunding in its first year. The growth of equity crowdfunding in the U.S. has continued at a fast pace, with an estimated $2.5 billion raised in 2015 and expectations that it could reach $36 billion by 2020. At this rate, equity crowdfunding will supplant venture capital as the largest startup funding source.
Platforms like FundRazr and GoFundMe have popularized the concept of donation crowdfunding. With just a few clicks, anyone can start their own online fundraising campaign to ask for financial support for any type of cause.
Donation crowdfunding is a highly effective tool that empowers even the smallest nonprofit organizations or even single individuals to affordably and quickly raise money. Many thought leaders in the nonprofit fundraising space are predicting that crowdfunding will become a more popular option as a fundraising tool.
Rewards-based crowdfunding has been made internationally famous by platforms like Kickstarter and Indiegogo. The premise for this type of crowdfunding is that an entrepreneur or a small business posts a project on the platform, usually with a write-up and a video explaining that explain it. The project creator also provides a fundraising goal that must be met before a specific deadline in order to be considered successful. Typically, supporters of the project are offered some sort of incentive for making a financial pledge, with the larger donations usually earning a more attractive reward. If the goal is met or exceeded before the deadline, then all of the money pledged is collected, and project backers are sent their rewards.
Due to its continued success, rewards-based crowdfunding is becoming a viable alternative to traditional seed funding, according to a recent report. The data in the report revealed that rewards-based crowdfunding grew by 25 percent when measured by the amount of money raised. One of the biggest success stories from this type of crowdfunding occurred in March 2015. Pebble raised over $20 million on Kickstarter for its second smartwatch, setting a new fundraising record for the platform and 4,000 percent of the original goal.
Debt Crowdfunding (Lending)
Last, but certainly not least, another well-known form of crowdfunding is debt crowdfunding. This is a type of alternative financing for both business and personal use that is often referred to as peer-to-peer (P2P) lending. There are many platforms to choose from, like personal or business loans from Lending Club, or solely small business loans from Funding Circle.
As mentioned in the introduction, the future outlook for debt crowdfunding is very optimistic. With more businesses and individuals looking beyond banks to borrow money, marketplace lending will most likely continue on its upward climb for several years to come.
Like other areas of financial technology, crowdfunding is still a puzzle that many regulators are still due to the fact that it falls outside of the traditional scope of financial industry rules. In the United States, where regulators are continually raising the standards that all financial services companies are expected to follow, the Department of the Treasury is being cautiously open to alternative finance.
“At Treasury, we will seek to foster, not impede, innovation that increases competition and broadens access to affordable credit for creditworthy borrowers and businesses,” said a Treasury representative. “But we will also be vigilant in ensuring that innovation does not undermine important privacy and consumer protection priorities. And we plan to continue our work in close dialogue with our regulatory partners.”
Such a statement bodes well for the crowdfunding industry as a whole. As crowdfunding comes under greater regulatory oversight, it will gain further credibility and trust from consumers and businesses as a safe option when seeking out loans.
Although crowdfunding is an excellent way to raise money, it’s also becoming a popular way to swindle people. Crowdfunding is built on trust, which makes it ripe for fraud. In our next crowdfunding post, we will highlight crowdfunding scams that made headlines and garnered enough attention from the Federal Trade Commission to cause them to take action.
Infographic source: Forbes.com