The term crowdfunding, defined as a source of alternative finance where a project is funded through raising small amounts of money from a large population, usually through the internet, is taking off in a big way in the United States and throughout the world. It is estimated that there are over 2,000 crowdfunding platforms for a variety of different purposes (real estate, consumer products, business ideas, etc.) with more than $34 billion raised through these combined platforms in 2015 alone. For reference, this is more than the $30 billion raised in venture capital each year and is, therefore, a force to be reckoned with in the world of investing.
There are a number of implications that pertain to all industries that utilize crowdfunding and implications that are more industry specific. All industries, for example, utilize one of two primary methods for crowdfunding: equity and non-equity. Naturally, equity crowdfunding involves the raising of capital and contributions through the disbursement of equity or shares in the organization. Non-equity or “rewards-based” crowdfunding involves an exchange of financial contributions for non-equity things, which can include almost anything the fundraiser wants to give away. Examples could include anything from physical items or non-physical rewards like naming rights or social media shout-outs. Both equity and non-equity crowdfunding platforms have been effective in a variety of industries.
Moreover, both equity and non-equity strategies have been effective in their own ways depending on the platform. The largest non-equity crowdfunding site, Kickstarter, has alone raised over $3 billion in financial contributions for thousands of organizations all over the world. Equity crowdfunding sites in 2013 alone have funded over 300 projects. That sort of power should have traditional investment platforms scared. The ability of crowdfunding platforms to scale massively to meet the needs of worldwide projects and for capital allocations to come from anywhere in the world means crowdfunding platforms have a wider reach and more sources of capital than any other source of investment. While this does not necessarily translate to a complete industry disrupter, like ride-sharing or home-sharing companies, industries once dependent on traditional sources of capital now have new means of funding their projects.
Take the real estate finance industry for example: there are many projects looking for funding all the time, and only so much traditional investment money to be allocated to those projects. In addition, the barriers to entry for small businesses often prohibit smaller real estate projects from taking a seat at the table and working with larger investment banking institutions. However, platforms like AngelList, EquityNet, EarlyShares, and other equity crowdfunding companies remove some of the barriers to entry, like capital requirements and professional experience/credentials. Each organization still has some restrictions in place, including some form of minimum committed investment (usually around $25,000) or some documentation filed with the SEC. On the whole, platforms like these allow projects to become financed where there may not have been the opportunity before. These include projects like YOTEL San Francisco, a high-tech, mid-market property with 203 rooms and an onsite restaurant that sought a portion of its equity (10-15%) through equity crowdfunding. AKA United Nations Hotel-Condo is another project, a $95 million extended-stay hotel and condo project with around $12 million in contributions from equity crowdfunding.
Another industry being disrupted is the technology market, both on the consumer level (remember the Fidget Cube? That project was crowdfunded for $6.5 million), to larger projects focused on advanced manufacturing and robotics. There is now a community of startup incubators, consultants, thought-leaders, and of course, crowdfunding platforms, solely dedicated to crowdfunding technology startups. With such a tight knit but expansive community, startups often eschew Wall Street in favor of crowdfunding platforms; they can do it all from the comfort of their couch (provided they have access to WiFi).
Moreover, it is important to note that not every project has to be successful for the idea of crowdfunding to continue to eat into the market share of traditional financing institutions. TechCrunch identifies many tech startups that have failed for one reason or another (poor leadership, too little funding, competition, etc.) One of the most dramatic examples is Star Citizen, one of the most funded projects in Kickstarter history, which to date has amassed more than $150 million since the campaign launched in 2012. However, that sort of money has been more hurtful than helpful, pushing back the launch date of the game as the creators kept expanding the scope and features of the game. With no declared publish date for the game as of this writing, the question still remains if the game will ever launch. There are hundreds more examples of projects falling through despite substantial monetary backing via crowdfunding. However, the point is that a community for these niche projects exists, and that community has a much deeper pool of “investors” and capital than traditional investment institutes thought possible.
Finally, let us not forget the additional benefit that crowdfunding provides: a sense of ownership in the project. When individuals participate in crowdfunding a project, they do not just send their money away without having the opportunity to get to know the project. Crowdfunders have the choice to become an active supporter and champion of any particular project should they want to.
One prominent Pittsburgh example of non-equity crowdfunding is the Superior Motors restaurant project by acclaimed chef Kevin Sousa. The project raised $310,225 from over 2 thousand backers over a period of one year. Tiers of rewards were used, varying from $25 dollars for a twitter “shout out” to $10,000 dollars for a fully funded function of the contributor’s choice. This type of project, with local community support and rewards that give back, is why crowdfunding is taking off.
There has never been this level of personal involvement in large-scale projects like these in my lifetime. Giving individuals a voice in this way allows people’s dreams to come true, and allows project contributors to help them come true. The disruption we see in this industry is a good thing, and instead of killing off or threatening traditional enterprises like Uber did to taxis or Airbnb did to hotels, I think more opportunities will come out of crowdfunding, not less.