According to a report submitted by Massolution, the total global crowdfunding amount reached $34.4Bn by the end of 2015. Fast forward to today, the crowdfunding industry data reveals that it will surpass venture capitalism in volume by 2020. In contrast, the Venture Capital industry shows regular trends of investing $30Bn each year.
In 2014, Asian crowdfunding volume increased by 320% whereas the North American crowdfunding volume increased by 145%. According to this report, Business and Entrepreneurship represent the most popular crowdfunding industry with 41.3% of total crowdfunding volume.
Crowdfunding is expected to surpass Venture Capitalism by 2020
The crowdfunding industry is doubling every year showing different types of trends in business including rewarding, lending, donation, equity, and others. Critics believe that the new laws enacted in 2013 have paved the way to the already accelerating growth of crowdfunding. The rules were issued by US Securities and Exchange Commission and explain investor terms like duration of contract, worth of investment, and rules for disclosure by companies. It also explains the crowdfunding platform rules, granting more securities to investors and borrowers.
A Quick Look on the Background
Commercial bank investments and peer-to-peer lending are not new concepts. But do you know how crowdfunding was born? Let’s have a quick at its background.
In November 2009, Brian Flatow and Michael Migliozzi started a website. The website, named BuyaBeerCompany.com, was working to buy Pabst Blue Ribbon Beer Company, which ages more than a century. Till 2011, the pair of geniuses had attracted 5 million investors raising $280 million. The average pledge per investor was $40 only. US Securities and Exchange Commission came to know about the company and stopped its operations.
The problem was really BIG. The company was targeting unaccredited investors. Plus, it was not registered with SEC. Both of them escaped charges because the website was still under process and no real money exchanges had happened. When the incident came to the limelight, it opened up doors to the concept of crowdfunding as prominent investors now started looking into the perks of invigorating cash-strapped start-ups, generating new jobs and making profits.
After 4 years, crowdfunding is all set to become one of the best investment opportunities globally
6 Trends to Shape the Future of Crowdfunding
The future of crowdfunding is expected to be bright but here we have compiled a list of 6 trends that can shape the future of crowdfunding.
#1: Major Players will win Over Small Platforms
In 2013, there were only 308 crowdfunding platforms but 2014 shows robust development in the trends of crowdfunding, taking the number of crowdfunding platforms to 1,250, Masssolution reported.
Richard Sward, who works as a crowdfunding researcher at the University of California, says that crowdfunding is more like social media. There may be many platforms but only a few will rule the sky.
According to a trade newsletter published by Crowdfunding Insider, the number of mergers will increase, helping small platforms to grow. Small crowdfunding platforms may unite to compete against the big names but the world of crowdfunding will be ruled by major players only for the next few years.
#2: Venture Capitalists Will Require Crowdfunding
The start-up venture capitalists are already experimenting with their businesses to compare the services, gain experience, and get customer feedback by launching crowdfunded campaigns.
Ethan Mollick is a management professor at University of Pennsylvania’s Wharton School. According to him, a crowdfunded campaign is a good way to start your venture capitalist business and track its success in advance.
In August 2014, CB Insights conducted a one-of-its-own-kind study on venture capitalism. This data driven study analyzed 443 hardware projects which raised more than $100K on Indiegogo or Kickstarter. Almost $321million had been raised by the hardware industry on these platforms from 2009 to 2013. According to the report, SmartThings, Misfit, and Formlabs are the top VC-funded hardware setups. Surprisingly, the platform dominance trends revealed in crowdfunding were not found in venture capitalism.
When Foundry Group, a Colorado-based firm, announced to invest $2.5 million in crowdfunded campaigns, Mollick concluded by saying that Crowdfunding has become mainstream and Venture Capitalists are taking its notice.
#3: Corporate America May Take Over Crowdfunding Sky
Crowdfunding is not left for Indies anymore. Big names like Kia and Swart have also launched crowdfunded market campaigns for testing their fresh products.
According to Swart, taking corporational matters to social engagement platforms or crowdfunded platforms may offer innovative corporate solutions and alternatives for focus groups.
The companies are securing their market reputation while testing new ideas by launching campaigns under ownership of smaller subsidiaries. The concept of E-Ink was launched on a Japanese platform by Sony. It was marketed as a project of Fashion Entertainment, described as a division of the tech company that makes next generation wearable watches.
Overall, if Fortune 100 companies take over the world of crowdfunding, it will become very difficult for small businesses or start-ups to stand out in the crowd. So start working today if you want to make it big tomorrow.
#4: More Professional and Strategic Infrastructure
When crowdfunding was raising its head from the roots, we saw less professional operational infrastructure. After the enactment of 2013 laws by the SEC, crowdfunding has started to shape up in a more professional way. The start-ups are hiring professional people from recognized organizations or outsourcing the operations to professional campaign managers.
Agency 2.0 is a Los Angeles based company. The company started its crowdfunding operations in 2010. In 2010, the company raised $168,000 through crowdfunded campaigns. According to the 2014 records, the company has already managed 200 crowdfunded campaigns and raised around $850,000.
According to the agency, their customers produce great products but are not very efficient with crowdfunding so they outsource their operations to Agency 2.0.
The business relationship between product manufacturers and crowdfunding managers is quite simple. For example, some agencies offering outsourced services charge 5 to 20% of the campaign as management fee. Some agencies like Agency 2.0 charges $3000 to $25,000 per campaign, the cost depends on the complexity of a project.
As crowdfunding is moving to more professional infrastructure, it is expected that more crowdfunding management agencies will be born and crowdfunded campaigns will reflect professional and strategic operational policies.
#5: More Effective JOBS Act and Equity Model
US Securities and Exchange Commission released a press release in December 2014. The press release talks about amendments to be implemented in the JOBS Act. The amendments have allowed accredited investors to become a part of equity crowd-funding. CircleUp, Angel List CrowdFunder and many other new platforms have emerged to facilitate the transitions.
The investment-seekers can look for bigger checks and the investors can get company stakes with amendments in Equity model.
#6: New Funding Models May Introduce New Dimensions
Different types of crowdfunding models are now redefining the shape of modern crowdfunding. For example, Braveheart Investment Group and Crowdcube are working in partnership to allow investors to make money in their areas of interest. Initially, this model was not considered beneficial in US business infrastructure but crowdfunding is taking modern shape and it is just a wait-game right now.
Currently, this model is illegal in America under the Equity Model but it may become effective in the near future, provided it is effective and beneficial in the US business infrastructure.
Crowdfunding is a maturing business industry which may surprise us by taking unexpected shapes. According to Forbes, the World Bank has estimated the productivity of crowdfunding to be $90 billion by 2020 but as it is doubling over the years and winning over its competitors, it may reach this milestone by 2017. Venture capitalism is expected to grow by 45% till 2017 and angel investments are expected to remain unchanged or show slow growth. By 2017, angel investments are expected to reach $20 billion per year.