One of the outcomes of the 2008 global financial crisis was the “funding gap”. Banks were less willing to provide loans and investors moved capital into more stable platforms. In general, the market tolerated less risk.
In this new environment, raising capital became the greatest challenge for small and midsize businesses (SMBs). They needed new platforms. Enter crowdfunding.
While some players have been around since 2008, the huge crowdfunding wave crashed onto the market between 2012 and 2013, particularly in Europe and the U.S. As of April 2012, there were more than 450 crowdfunding websites worldwide.
Given the relatively recent arrival of the crowdfunding wave to the market, its future iterations will be interesting to follow.
Here are six waves to watch in crowdfunding.
1. Crowdfunding will continue to grow. Online crowdfunding platforms raised $2.7 billion in capital in 2012 with expectations that the number would reach $5 billion by 2013, according to a study from crowdfunding-focused research firm Massolution. And these figures will likely continue to rise.
The World Bank commissioned a study and estimated that by 2025, the global crowdfunding market potential could be between $90 billion and $96 billion.
This reveals that more entrepreneurs are turning to crowdfunding as a low pressure route for raising startup capital for their businesses.
And while these figures take into account all crowdfunding models, the equity model could see a huge spike. Current equity crowdfunding rules by the SEC allows only participation from accredited investors. And with only 3 percent of the accredited investors in the U.S currently participating in startup investing, the prospect of the figure doubling is likely as more VCs embrace crowdfunding as a viable investment vehicle.
2. More industries will cut out the middle. Crowdfunding allows startup companies to connect easily with investors without going through a costly middle man. This trend is fast gaining traction in industries like real estate where there are many middlemen between entrepreneurs and prospective investors.
For instance, real-estate agents, brokers and other intermediaries can significantly escalate the cost of executing projects. Some real estate development firms have decided to raise capital through crowdfunding to save on the cost of agent and broker fees. CEO Zeke Turner of Mainstreet Property Group raised about $1.8 million from accredited investors through its partnership with CrowdStreet, a crowdfunding platform.
3. Larger emphasis on social-media driven marketing. Because entrepreneurs are reaching out to people beyond their network, crowdfunding relies heavily on its “social edge” over more traditional marketing methods that cater to smaller group of investors. And startups are taking note, providing easier ways to engage with an expanded audience.
New platforms, such as FundRazr, a social-media crowdfunding website has emerged to help generate traffic for an entrepreneur’s crowdfunding campaign. Among other features, FundRazr helps generate awareness for a crowdfunding campaign through a user’s social-media networks on sites like Facebook and Twitter.
4. More money will be invested in crowdfunding opportunities. Many large financial institutions, VCs and angel investors are moving assets into the equity crowdfunding wave. Some of them are even using their brokerages to advertise about crowdfunding opportunities to their investors, hoping to make money as advisors to those seeking investment counsel. The participation of these large brokerage firms in crowdfunding helps validate it as a new financial model.
A recent study by crowdfunding platform ourcrowd reveals that of the 500,000 active angel investors in the world, 50,000 have invested through equity crowdfunding platforms.
This trend helps entrepreneur gain access to big capital from top-notch investors they normally wouldn't have been able to connect easily with.
5. Niche platforms will increase. While there are major crowdfunding platforms like Kickstarter and Indiegogo that cover various markets, there are niche platforms popping up for specific areas. By utilizing these platforms, startups now have a better chance at reaching their targeted audience.
For instance, there are new platforms that specialize in areas like book publishing. Examples include Pentian and Pubslush that connect self-publishing authors with investors. Pentian affords average investors, who put in as low as $10, the opportunity to fund a book publishing project. In return, early supporters receive a signed copy and a share of the author’s royalty in the future.
6. Regulation A will become a bigger deal. Regulation A may serve as an alternative to equity crowdfunding provisions in 2014 and beyond. Regulation A allows smaller ventures (under $5 million) to avoid some of the more onerous financial reporting requirements until they amass greater profits. Already, Fundrise, a real-estate crowdfunding platform, is leading the way by leveraging on state laws which enables it to afford non-accredited investors the opportunity of investing as little as $100 into projects listed on its platform. This is good news for entrepreneurs interested in impact investment activities in specific communities of interest.
Also, startup entrepreneurs who haven't been able to raise capital for their businesses from high profile investors can now also do so easily from retail investors in their neighborhood.
In addition, with the cap for amounts raised through a Regulation A offering currently placed at $5 million, this is an opportunity for early-stage entrepreneurs who have started setting their sights on expansion.