Many people have probably heard of crowdfunding due to Kickstarter or another similar platform. But what do these funding options mean to financial businesses? That is a question many in the financial industry are asking as crowdfunding continues to grow year after year. Consumers, investors, and leaders in finance need to understand what crowdfunding is and how it is changing the world of investing.
CrowdfundingCrowdfunding is a way of funding a project by raising fund through the contributions of many people. Most crowdfunding happens over the internet and seeks money for a service, cause, or product. The flow of a crowdfunding is usually similar no matter the project or platform.
- A project leader formulates a project and plan.
- They choose a platform to host their campaign and collect funds.
- People support the idea and donate.
The most common types of crowdfunding are donation-based, reward-based, pre-sales based, lending-based, and investment-based.
The rise of crowdfunding
People who invest use crowdfunding for multiple reasons. Many investors are staying away from traditional models due to the financial crisis, the volatility of the markets, and the domination of large companies. These factors make it difficult for investors to get a return on their investment.
Crowdfunding allows them to invest in projects which they feel will make them the most money. Crowdfunding has also made it much easier and cheaper to find diverse projects to invest in. With so much interest, crowdfunding has expanded beyond the cases that people hear about where a product is funded and then produced for consumers. There are thousands of platforms with specific types of projects: property, energy, technology, education, and many others.
The challenges of crowdfunding
The world of crowdfunding is a bit saturated. There are platforms and projects everywhere. It is constantly changing and evolving and disrupts the traditional model so much it can be confusing for many investors.
Too much choice
Investors have to sift through all the platforms and all the projects to find ones that they feel are the safest investments. It can be a bit overwhelming to try to find that needle in the haystack.
A lack of data
There is also not much data on crowdfunding or specific projects. When investors are looking to invest, they do not have data and analytics to help them make decisions like they would in more traditional investment scenarios. Even though crowdfunding has a good amount of transparency, it can still be difficult to find the data that most investors are used to.
Examples of crowdfunding platforms
There are so many crowdfunding sites to choose from it can be difficult to know where to start. The following sites are standouts due to their innovative ideas, scope, or geographic location:
- Mintos in Latvia and Solvesting in Kenya are bringing crowdfunding and investing to places of the world that are not known for their financial systems.
- Invest4Justice and Prodigy are platforms that provide investors the opportunity to invest in solutions for specific problems. Invest4Justice is a US legal case platform, while Prodigy is a student finance platform.
- Ratesetter, Funding Circle, Prosper, and Crowdcube are all platforms in the realm of property, loans, and small business equity.
- KIVA helps finance microloans to entrepreneurs in developing countries, while Abundance offers renewable energy investments to everyone.
- GoFundMe is a platform for people to raise money for different life events and challenges. The platform has raised over $2 billion for various projects.
- Kickstarter has projects related to technology, music, art, games, design and more. They have helped over 80,000 projects get funding.
- APPBACKR allows investors to invest in app development, ALUMNIFINDER promotes funding projects for college campuses, and Giveforward provides investments in medical expenses.
- The possibilities are endless. Most likely, if there is a certain cause or market that an investor is looking for, there is probably a platform for it.
The future of crowdfunding
The future of crowdfunding is one that is full of potential. In all markets around the world, the number of platforms and amount of investment is expected to grow. In fact, according to the Global Crowdfunding Market Report, crowdfunding is expected to grow at CAGR of almost 27% from 2016 to 2020.
How crowdfunding has been growing over the past years
In 2010, crowdfunding raised about $880 million in funds. By 2014, that grew by 167%, raising about $16 billion. One year later, the amount was double: $34 billion. If that rate continues, crowdfunding could raise $90 billion in 2017.
Following a similar pattern, the number of platforms rose from over 700 in 2012 to over 1250 at the beginning of 2015. Going into 2017, that number could be well over 2000.
Crowdfunding will get much bigger
Over time, investors will collect more data about these platforms and low-quality platforms will disappear. Many large financial institutions may also begin to create their own platforms. Moreover, new models for funding will begin to appear, diversifying the crowdfunding market and allowing people to invest in different ways.
Crowdfunding is much bigger than many people realize. The rate of growth and the types of projects that get funding every year may surprise people, but as it continues to grow it becomes larger competition for the traditional system.
Who knows what the future holds for crowdfunding, but at this rate, crowdfunding may no longer be the alternative, but just the norm.