Wednesday, 25 May 2011

Crowdfunding v1.5

“The Internet is fundamentally replacing the economics of scarcity with the economics of ubiquity”- Eric Schmidt MWC Keynote February 2011.

Web 2.0, the proliferation of fast internet access and the explosion of social media have given a greater sector of society an unprecedented ability to exert their influence. Referred to as the “crowd” this encompasses a large group of people or community whose collective intelligence or resources, often accessed through the internet, can be exploited in a variety of intuitive ways. For example crowd funding, where small monetary donations from a group of individuals is used to amass a larger pool of capital.

Crowd funding platforms such as Kickstarter and IndieGoGo showcase independent and entrepreneurial projects (e.g. in music, film, art, technology, design, food, and publishing) in need of funding to an online community of interested and open minded individuals. Based on relative affinity to projects, individual tastes or spontaneous decisions, donations from as little as $5 to thousands of dollars are made towards a total sum specified by the project creators. In return for donations a token of appreciation or gift is made, for example the product itself or a credit towards that piece of work. The success and appetite for leveraging crowd funding in this manner is evident in that Kickstarter has launched 7,496 successful projects which have collected over $40m dollars. One of the runaway successes of the site has been TikTok + LunaTik, which enables an iPod nano to be used as a wrist watch, raising $941,648 from 13,511 backers in just 30 days. In giving consumers an acute insight into the journey from concept to prototype to final product, these platforms personalise the relationship between producer and consumer. Furthermore budding entrepreneurs gain an insight into the creative process.

Up until now most crowd funding platforms have existed in this format, whereby investments are made in the form of a donation. A crowd funding based equity infrastructure has not been established as of yet, particularly in the US due to SEC regulations. Currently, entrepreneurs can only utilise the crowd to raise capital solely for their businesses in the form of loans from peer to peer (P2P) lending sites such as LendingClub and Prosper. In America these regulations are in the process of being amended, opening up the possibility of crowd based equity investing. These changes include increasing the number of shareholders a company may have (SEC limit currently stands at 499) and relaxing general solicitation rules on private placements. From an entrepreneur’s perspective, especially for small start-ups requiring low level investments, this could offer a vital alternative method of raising capital. This is even more pertinent as traditional forms of investment have become far more difficult to access in light of the recent financial crisis. Startups such as Profounder and Peerbackers LLC demonstrate how more business orientated crowd funding platforms can function.

Excitingly or controversially, depending on your perspective, these changes and the influence of the crowd in general are having a disruptive influence on venture capital (VC). Platforms such as Angellist and Grow VC are opening up the traditionally highly cloistered networks within the venture industry. Typifying the openness and accessibility of a crowd based network, they expose angel investors to entrepreneurs and start-ups. However VCs are wary as it could compound an already existing headache, namely the recent lack of VC-backed IPOs, by encouraging companies to stay private for longer. Moreover, some people are questioning whether it is wise to trust the wisdom of the crowd in speculatively investing their own money, especially with respect to larger investments.

Naunidh Virk & Shillat Hussein
Sales and Research Analyst

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