Is Crowdfunding a Replacement to Traditional Money-Raising Methods?

Last month, I was moderating a panel in which there were speakers from Indiegogo, Yelp and Hotels Tonight. I had a great discussion before, during and after the session with the Indiegogo person about crowdfunding. Crowdfunding is the uber concept of raising capital rather than seeking loans from banks. These platforms could be seen as intermediaries between donors and beneficiaries. In 2014, the total crowdfunded amount was estimated to be around $16 billion. The trend is expected to continue and the amount of money raised is going to surpass the traditional fundraising (through venture capital, etc.) by 2016, which accounts to approximately $30 billion each year today.

The concept of crowdfunding gained momentum in 2012 after the implementation of JOBS Act in US. It is a law intended to encourage funding of United States’ small businesses by easing various securities regulations. Crowdfunding can be categorized under three main categories according to Forbes:

  1. Donation and Rewards: According to the 2015 Massolution Report, the market size of the industry was $4 billion in 2014. The segment includes players like Kickstarter and Indiegogo and it allows anyone to seek funding from anyone else. You list a product (or would be product) or an idea and hope people will book it in advance and pay you now within the campaign period. The money raised will help in manufacturing or bringing the product to the market. This could be a drone, a iPhone cable or a charity.
  1. Peer to Peer Lending: This includes peer-to-peer lending sites such as Lending Club and Prosper which helps in connecting borrowers to lenders for personal as well for business loans. Lending-based crowdfunding grew 223% to $11.08 billion in 2014.
  1. Equity crowdfunding: This is further subdivided into two categories. One are accredited platforms which are available to only accredited investors. It includes companies like AngelList, FundersClub, etc. Another category is equity crowdfunding by anyone, accredited or nor. With the establishment of new laws in 2013, the equity crowdfunding market is picking up the pace. According to Massolution, equity-based crowdfunding grew 182% to $1.1 billion in 2014. This is where blockchain is going to play a major role in the future.

The most active categories for the crowdfunding industry in 2014 were business & entrepreneurship (41.3%) followed by social causes (18.9%) and films & performing arts (12.13%).

Source: Massolution 2015 Crowdfunding Industry Report

According to The World Bank estimates, the crowdfunding would reach $90 billion by 2020. The implementation of Title II of the JOBS Act has opened new doors for equity crowdfunding which is estimated to reach the value of $2.5 billion by 2015.

Source: Crowdfunder

However, the equity crowdfunding market is limited to accredited investors only and hence, it holds massive future opportunities and growth probabilities. Investors are waiting for the implementation of Title III and IV of JOBS act which is expected to give new opportunities to the entrepreneurs as well as to investors.

We have listed some of the major drivers for the success of the crowdfunding industry:

  1. Potential untapped market for investors.
  2. Organizations that don’t want to raise funds through traditional methods as they might not need the same transactional infrastructure as other big firms.
  3. Potential in equity and debt-based crowdfunding.

It will be exciting to see how future trends will shape up the crowdfunding market and what benefits it holds for young entrepreneurs.