Crowdfunding has become a buzzword among entrepreneurs, inventors, and the creative community. Impressive growth has occurred during the last couple of years, especially in rewards-based and peer-to-peer lending industries. In 2013 alone, we’ve seen significant progress in legislation regarding equity crowdfunding in the US, specifically in private placements involving accredited investors. While the general public is still learning about the phenomena mostly from articles about Kickstarter success stories, experts are divided into two uneven groups: those (the majority) who praise the great future of crowdfunding and those who expect an ocean of fraud and massive financial losses for unsophisticated investors and backers.
In preparation for the Aspen Global Investment Forum, the first major industry conference in 2014, I’d like to offer my two cents by looking at the trends I expect to see in 2014.
· Rewards/Donations-Based Crowdfunding
· Fast growth internationally, especially in less-developed countries. Those interested in the topic are invited to read the recently published report of the World Bank Crowdfunding’s Potential for the Developing World.
· At the same time, I expect slower development in the United States. While the market will continue to grow, we will see more fatigue and scandals related to funded products that are not being delivered or are of significantly inferior quality. Besides that, from my personal experience as a crowdfunding consultant as well as from comments made by several other people in the industry, I see a growing trend of companies using crowdfunding (mostly Kickstarter) as part of their marketing strategy to attract media attention and to approach professional investors (business angels and venture capitalists). In this case, they use their own money to create fake pledges and simulate high market demand/popularity of their product. I have already written about this subject in my post, and I will examine the phenomena in-depth next year.
· I expect to see more interesting developments among niche platforms providing industry expertise and additional services, such as hardware and university crowdfunding, and Do-It-Yourself (DIY) crowdfunding. Dragon Innovations was a pioneer in employing crowdfunding into the existing business model of an established company. I believe we will witness the entrance of other large companies, for example, publishing houses or e-commerce sites. As for DIY crowdfunding, we have already seen several projects that managed to raise millions of dollars without a middleman. The platforms follow the trend, and some of them have started offering or will soon offer an option of independent crowdfunding. Crowdtilt in the US is using it already, and Australian Pozzible and Canadian Fundrazr will present it soon.
· Another trend that has started from Pebble Watch and which I expect to continue is an interest from the business angel and venture capital community in products succeeded in crowd funding. Some of the most impressive 2013 VC deals were funding of Misfit Wearables ($15.2 million), Ouya ($15 million), and Oculus ($91 million in two rounds of financing).
· Established global companies have included crowdfunding in their marketing and HR and R&D activities. It will be also adopted by a significantly larger number of corporations. Current participants include IBM, Phillips, Honda, Square Enix, the Mexican subsidiary of Coca-Cola, ING Direct, Warner Brothers, and ABN-Amro.
· Equity Crowdfunding
Equity crowdfunding will certainly see many interesting developments in the US and globally.
· In the US, the recent lifting of the ban on general solicitation will lead to a significant increase in investment marketing activities (mostly hedge) funds. Accredited investors will have much better access to information about private placements, which is supposed to stimulate their interest in small-business financing.
· Increased publicity may result in a wider adoption of crowdfunding by angel groups. We have seen this year the creation of a crowdfunding platform in the UK by the investors’ network AngelDen. AngelList syndicates will become an important player in the private placement market in the US.
· At the same time, Title III, while expected to become a law, in its current edition, is not going to create too much excitement or generate fresh money to fuel start-ups. On the entrepreneurial side, it carries too many regulations and potential costs (up-front as well as annual), making any raises over $500,000 prohibitively expensive. On an investor side, while it is supposed to attract “average Joes” to invest in local start-ups, the investment limitation of $2,000 or 5 percent of an annual income makes it impossible to build a diversified portfolio. Considering the high failure rate among start-ups, diversification would be the most reasonable strategy to protect an unsophisticated investor from financial loss My company, Crowdfund Productions, has hosted several conferences in different states with tens of founders of crowdfunding platforms speaking. Most of them express no interest in moving forward with Title III crowdfunding.
· Common dissatisfaction with Title III regulations has caused local authorities to step up. We have seen more and more states implementing their own intrastate crowdfunding exemptions. Almost ten states have now either legalized crowdfunding for the general public or are discussing the bill in their individual state congress.
· Considering my limited expectations for Title III crowdfunding and growing interest in the concept at the state level, I wouldn’t be surprised if JOBS Act 2.0 is debated in the 2016 presidential campaign.
· While still in their infancy, niche equity platforms, especially in real estate, have shown significant growth. We are witnessing an emergence of new real estate crowdfunding portals almost every month, and this trend will continue in 2014. Realty Mogul, the most publicly active US real estate crowdfunding company, has facilitated more than $10 million in investments in less than a year. American Homeowner Preservation, offering investments in a distressed mortgage pool, was able to close their first offering of $4,660,000 in less than two months. Next year will be the time for education about crowdfunding for real estate developers, lawyers, and realtors.
· This year we have seen active legal debates about equity crowdfunding in many countries, including the United Kingdom, Italy, Canada, and France. I am sure these will continue in 2014 and, in addition, the Western world will learn about Asian models (for example, South Korean crowdfunding).
· Debt Crowdfunding
Currently, debt crowdfunding, particularly peer-to-peer lending, represents the largest segment of the crowdfunding market, being responsible for more than half of all money invested. While other countries have their own laws (often more developed and favorable for the new industry than in the US), we have only two major options available to nonaccredited investors nationally (with several states being exempt): Lending Club and Prosper. Other lending platforms are limited to working only with accredited investors and financial institutions.
· I expect rapid growth in the social lending industry to continue next year. Besides the most common consumer credits, we will see further developments in student loans and, most importantly, the peer-to-business industry. Lending Club recently announced its entrance into the small-business loans niche. While Prosper hasn’t indicated the same interest, more than 10 percent of its current portfolio is dedicated to personal loans for small businesses.
· Title II of the JOBS Act now allows lending portals to openly promote their activities, and Title III, when enacted, may affect the peer-to-business industry by bringing additional sources of funding. There is a significant need, however, for regulatory changes, and I hope some will occur next year.
· Financial groups and investment funds have already started outsourcing some of their activities (for example, loan originations by local banks) to lending platforms. With further progress in technology and significantly lower overhead costs for social lenders, I expect major institutions will adopt this common practice.
· Recent research has indicated a movement among many wealthy families and accredited investors toward impact investment, which gives companies originating business loans for clean tech and alternative energy (such as Solar Mosaic) a big advantage in attracting sources of funding. I believe new lending marketplaces will emerge that are devoted to supporting responsible business practices.
Generally speaking, we will see continued growth in all categories, with development of less-mainstream businesses, such as future earnings exchange, royalty-based crowdfunding, and peer-to-peer foreign currency exchange.
A growing market will lead to activation of merges and acquisitions and possible adoption of the mechanism by established companies.
Next year will be a time of active cross-border partnerships and expansions. We’ve already seen this trend this year: Kickstarter has opened its operations in Canada, Australia, and New Zealand; Pozzible (the largest Australian rewards-based platform) has started its activities in the US; Fundrazr (a Canadian rewards-based platform) is actively engaging European customers; the British P2B lending platform Funding Circle merged with the US Endurance Network; Australian ASSOB, Israeli OurCrowd, and Dutch Symbid are actively pursuing opportunities in the US; American Crowd Valley has expanded into the UK through its partnership with Sapphire Capital Partners LLP; and British Seedrs has offered its services across Europe.
Crowdfunding will lose some of the “newcomer” shine and will be less intimidating for a wider investment community. Venture capital firms and business angels will be more comfortable investing in crowdfunding platforms and crowdfunded businesses. According to the research conducted by Alex Feldman from CrowdsUnite, $866 million has been invested by VCs and angels into crowdfunding platforms. As far as I know, the data is incomplete, and with recent additional funding of CrowdTilt ($23 million, the second round in 2013) and $125 million for an emerging P2P platform FreedomPlus created by Freedom Financial Network, the amount of VC and angel funding will exceed a billion dollars.
Next year I also expect to see several large-scale projects initiated by civil or scientific organizations or maybe even government entities. This year’s most ambitious projects include Ubuntu Edge, which was trying to raise $32 million on Indiegogo; Star Citizen, which has reached a record $35 million in pledges by now; and Wikipedia currently trying to raise $50 million.
All of these developments will bring crowdfunding into the mainstream and significantly increase the number of industry stakeholders. I hope 2014 will be a year of healthy growth and exciting new developments for the private investments industry as well as for the worldwide entrepreneurial community.