“Crowdfunding” only appeared in its current form around five years ago. It’s still a new funding method and as such could be expected to be viewed tentatively by businesses. Recent data suggests this isn’t the case: crowdfunding now accounts for more overall funding than the typical annual investment offered by venture capitalists.
Kickstarter, Indiegogo et al. – Crowdfunding for consumers
Most of the highest-profile campaigns have started on the big-name sites that the term “crowdfunding” is commonly associated with. Kickstarter and Indiegogo have been instrumental in enabling the concept’s meteoric rise.
By making investment accessible and sociable, the sites have rapidly brought the paying public on board. They’ve also convinced entire industries to adopt crowdfunding campaigns, particularly in media and technology.
Double Fine Productions turned to Kickstarter to fund their latest video game having high success
Kickstarter
Crowdfunding has given emerging musicians a new platform to be noticed on. It’s also opened the door to amateur filmmakers and indie game studios. The successes have been accompanied by a string of failures and trolls that have attracted controversy but failed to drown the wider initiative.
Filmmaker Jeff Hays, producer of crowdfunded documentary programs, told Forbes in 2014 that the idea is something “most people should do.” “Crowdfunding has brought in billions of dollars and has been responsible for bringing about the discovery of a number of entrepreneurial hits,” he said.
Evolving the concept – Equity investments
The benefits of crowdfunding approaches are now being noted by traditional industries. Market sectors that may not seem to be a natural fit for the model are embracing its flexibility and low entry requirements for investors.
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Start-up Fundrise offers a “whole new way to invest” by letting you purchase small shares in urban real estate developments. These shares sell for as little as $100, a stepping stone that opens the market to scores of new investors.
Last year, online crowdfunding platforms accounted for $484 million of investment in real estate projects, according to a report from Bloomberg. There’s over 125 websites specialising in real estate funds, although not everyone relies on the mainstream platforms.
Going off the beaten track – Risks lie ahead
Seemant Nakra, an Austin, Texas-based entrepreneur, ended up using Craigslist to offer a 5 percent share in his real estate crowdfunding start-up for $50,000. Nobody accepted the deal, although it did lead to significant interest from people wanting to crowdfund Nakra’s apartment complexes. It proved to be a successful way to gain exposure and attract investment that wouldn’t otherwise have been available.
Some investors are enthusiastic about crowdfunding; others, less so
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Nakra isn’t alone in being enthusiastic about the potential benefits of crowdfunding. The opportunities it presents have been noticed by established members of the industry, many of whom are already exploring how to best utilise the model.
“Until recently, we only looked at traditional vehicles to raise capital. But we have started acknowledging crowdfunding as a new and powerful arrow in the quiver of real estate investors,” said Larry Connor, CEO of real estate investment firm The Connor Group. “If traditional businesses like us don’t start exploring this soon enough, we will definitely fall behind on a great opportunity.”
Whether crowdfunding is a “new and powerful arrow” or “still in the hype phase” depends on who you ask
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Others are more cautious though. One established real estate investor told Bloomberg that crowdfunding in big business is “still in the hype phase” and may not prove to be a long-term hit.
“I think it will be at least another year or two before the expectations become more realistic,” Ian Ippolito said to the site. He added that not every emerging site is quite what it seems. Many charge high fees and lack transparency.
More recently, there have been indications that unscrupulous companies could use crowdfunding platforms to raise money quickly for fraudulent use. The regular risks of crowdfunding are significantly amplified at this kind of scale.
Funding finance with the power of the crowd
Real estate isn’t the only “old” industry that crowdfunding is disrupting. It’s also having a profound impact on the banking sector where new peer-to-peer lending sites offer a compelling alternative to bank loans. Sites such as Zopa and LendInvest let individuals borrow money from other users. The people who lend the funds act as investors and are paid back a monthly fee.
This model has gained popularity since the worldwide financial crisis. The low interest rates offered by regular banks have made “alternative” approaches more appealing, a spokesperson for finance company Hargreaves and Lansdown told New Scientist in 2015. The firm pointed out that investors on LendInvest can see 6% returns, compared with a then-0.5% from the banks.
Banks are beginning to take notice of crowdfunding as more people use sites like Zopa and LendInvest instead of traditional borrowing methods
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With this kind of advantage, crowdfunding’s future as a first-class financing method seems to be fairly certain. It has developed from a niche online-only concept used by game developers and tech companies into a serious investment mechanism that raises billions of dollars each year.
There are lingering concerns that need to be addressed but tighter regulation and a stronger focus on platform quality should go some way to resolving these in the near future. The U.S. JOBS Act for investors provides safeguards for people participating in campaigns too, further ensuring the legitimacy of the model.
Crowdfunding: From tech start-ups to billion-dollar industries
Until recently, crowdfunding hasn’t been focused on creating sustainable, long-term businesses. Its rising use in long-established industries demonstrates it has moved beyond its cautionary, tech-centric infancy. The global crowdfunding industry has rocketed from $880 million in 2010 to $34.4 billion this year. By 2025, that figure’s expected to be $300 billion in real estate alone.
Kickstarter is a site on which artists, musicians and others can raise finance for their projects.
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While it’s not as stable as some investors would like, crowdfunding is clearly a viable funding route for the firm seeking the money and the participants providing it. It can be expected to gain more credibility as people become familiar with the concept and its applications outside of tech.
