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Investment Crowdfunding Is on the Rise

JL Law

Crowdfunding often brings to mind Kickstarter-like projects where participants only get the satisfaction of seeing a creative project come to fruition without any financial return. However, the landscape has changed so that crowd investors may now buy a real stakes in companies that provide return on investment. This is due to the rising market of investment crowdfunding.

There has been a sharp rise in crowdfunding platforms ever since President Obama passed the Jumpstart Our Business Startups (JOBS) Act in 2012. This legislation encourages funding of small businesses by easing up on securities regulations.

As a result, there are new opportunities that offer crowd investors a good return on their investments. For example, there has been a strong adoption of JOBS Act crowdfunding in the real estate industry, and crowdfunded investors are now participating in fix-and-flips, rental property transactions, commercial property developments, and other real estate investments previously unavailable to them in the past.  While some platforms allow all types of deals to be crowdfunding on their site, some portals only crowdfund their own deals or deals in a particular industry.

According to a 2015 report from Goldman Sachs, investment crowdfunding could become the most disruptive model of financing in the years to come. Similarly, the World Bank has predicted that the crowdfunded investments in developing countries could grow to $96 billion by 2025.

Crowdfunding overtakes venture capital investing

According to the annual report of research firm Massolution, the crowdfunding industry is on track to produce more funding than venture capital firms. The venture capital industry invests an average of $30 billion per year, while the market value for crowdfunded ventures reached $34 billion in 2015.

The crowdfunding industry has been increasing by double or more every year, and is spread across a wide variety of funding models. In particular, equity crowdfunding, which is being legalized in the United States, holds the potential to become greatly disruptive. In response to this trend, large venture capitalists and angels are beginning to integrate crowdfunding platforms into their business models.

Online platforms offer persuasive tools

Another reason for the success of crowdfunding platforms is the ability to create appealing content in online platforms. A study from a group at the University of Buffalo found that audio-visual elements were crucial to a project’s success. When this is combined with a good success track record, a project had good chances of gaining support.

Unlike traditional private investment which was done by pitch decks, private presentations, and a lengthy diligenceprocess, most crowdfunded ventures rely on a general solicitation of some sort, often through a web site. This makes rich multimedia content more important for compelling investors to risk their capital. 

It’s important to note, however, not to focus only on the internet.  Crowdfunding does not necessarily mean that you must use the internet.  It only means that you can solicit from the crowd; how you do it depends on you.  The whopping majority of crowdfunded deals actually are not conducted through any crowdfunding portal!  It’s just a business soliciting people through word of mouth, print media, advertising, and other forms of general solicitation that draws someone to invest.  Some of the folks that use don’t even have social media accounts or a website!

The levelling effect of crowdfunding

The growth of investment crowdfunding is partially due to the levelling effect of who can obtain investment capital. For example, recent statistics show that women tend to have more success than men in crowdfunded ventures, while in the traditional offline market, women are less successful.

A UC Berkeley-led study showed that the reason for women’s success in crowdfunding is due to their communication style. Researchers found that the words women choose create a more persuasive story that leads investors to get involved in their efforts.

It used to be that you had to have a deep rolodex and mingle with the rich and powerful to raise money.  Crowdfunding allows anyone with a good idea and some good marketing to find investors.

Continuing growth depends on maintaining trust

In this early stage of the investment crowdfunding market, it’s crucial that no issues of distrust arise before the legal precedents have been firmly established for the industry. The trust levels need to remain high for all parties as it relates to the quality of the fundraisers and the credit worthiness of the lenders.

Early incidents of foul play could lead to excessive measures to protect investors, which could strangle the industry.  It’s important to note that there will be fraud and failed investments in crowdfunding just as there is fraud and failed investments in regular finance. 

If crowdfunding can grow in awareness and survive the initial bumps it encounters, it will be the dominant form of capital raising in the future.