Crowdfunding: The Future or a Fad?

On 3 March 2016, it was announced that Kickstarter, one of the biggest crowdfunding sites, had reached a staggering $1 billion in pledges since the launch of the site. Crowdfunding is evidently a serious business. However, are we seeing a soaring business revolution or a precarious bubble about to pop?

The Rise of Crowdfunding

The term ‘crowdfunding’ has entered the popular imagination, defining a new generation of project creators. From the outset, it was viewed to be the domain of the ‘ordinary guy’; the plucky entrepreneur without the billionaire connections enjoyed by large, multinational organisations. In its most ideal form, the crowdfunding platform is a unique levelling device and a liberating democratic force, differing in ethos from the arguably elitist venture capital model found throughout mature economies.

It is estimated that 99.95% of entrepreneurs do not get the required funding from venture capitalists in order to get their project up and running. Frustratingly, out of the 600,000 new businesses launched each year in the United States, a paltry 300 actually succeed in securing venture capitalist financial support. It is therefore no surprise that the even playing field of crowdfunding appeals to ambitious, self-made men and women. Film makers, artists, entrepreneurs, activists and other innovators can now beam their creative ideas worldwide, with the sheer brilliance and potential of their idea taking precedence over the notoriety of their brand or the amount of cash in the company account.

Crowdfunding is shaping the future of diverse and influential sectors. Citizen journalism organisation Bellingcat regularly uses crowdfunding resources in order to fund their high profile investigative work, signalling a new trend for crowdsourced media projects. Cult musician Amanda Palmer raised $1.2 million through a Kickstarter campaign in order to finance her solo album. Palmer has even written a book about her campaign efforts, where she declares crowdfunding to be ‘the future of music’.

The Wider Economic Impact of Crowdfunding

Crowdfunding has proven to be an economic success in terms of the creation and preservation of a significant number of jobs. Furthermore, its potential for stimulating business growth has meant that many businesses have been able to expand their trade globally, becoming more competitive in the process.

Crowdfunding platforms have enabled small, individual investors to make crucial, early-stage investments in businesses, something that otherwise may not have been possible. One of the greatest obstacles to repairing the European economy is the difficulty in encouraging public and private funding. Some analysts have therefore heralded crowdfunding as the answer to boosting much longed-for economic growth in the Eurozone.

Crowdfunding is an effective tool for women and minorities, who are gravely underrepresented with regards to traditional angel investment methods. Roughly 42% of Indiegogo’s successful crowdfunding campaigns are run by women. This is a huge leap from the more traditional angel investment route, where only 16% of pitching start-ups are run by women – and out of this 16%, only 25% actually receive any funding. This brings a much-needed dash of diversity to the business world.

Furthermore, crowdfunding has had an impact far beyond the business sector, making an indelible mark in terms of social and global issues in what is becoming an ever-more connected and interdependent world. Crowdfunding has broken down the barriers of geography with individuals, businesses and organisations based in developing countries now having access to the sort of funding that was previously only available to those in wealthy nations. Over 90% of the online global population is now being reached through crowdfunding websites.

Do Crowdfunding Websites Exist in a ‘Bubble’?

This year, it was announced that claims management company Rebus had gone into administration, after receiving over £800,000 in crowdfunding money during the year 2015 via Crowdcube, the biggest UK-based crowdfunding platform. This incident has since been dubbed as the UK crowdfunding industry’s ‘largest failure’, serving as a bleak reminder of the risks involved in early-stage investment. Incidents such as this have caused something of a backlash amongst anxious consumers.

For many, this event signalled the beginning of the end of the crowdfunding dream but it is certainly not a unique case. For every inspiring crowdfunding success story there is a tale of disappointment, and the instant, publicised successes do not always prove to be sustainable in the long term for many start-up businesses. Sadly, many companies that have secured crowdfunding have since gone into liquidation.

Furthermore, there have been significant instances of project creators abusing the trust of investors. There have been occasions where the results delivered by the project creator were notably inferior to the aims that were originally stated. For example, certain project creators have acquired funding to create high-quality iPad accessories, with the end result turning out to be low-quality products made from cheap cardboard. Some project creators have failed to develop anything at all with their received funds, leaving investors in a very difficult and limited position in terms of recourse options.

Despite the booming crowdfunding industry, some financial experts believe that we are now experiencing a crowdfunding bubble, in which websites such as Kickstarter are merely a ‘fad’ that will soon pass rather than become the serious future of business investment. Loss of trust due to scam artists and broken promises are often said to be detrimental to the longevity of the crowdfunding industry. Some financial technology experts, such as Martin Campbell, Managing Director of Ormsby Street, warn that without improving crowdfunding regulations there could well be an ‘almighty crash’.

The Future of Crowdfunding

It is clear that businesses, platforms and investors are enjoying considerable benefits produced through crowdfunding and that, as such, it is an increasingly important means of finance. However, caution should be exercised. The crowdfunding industry is maturing and developing rapidly. Potential investors need to have enough current information to ensure that their crowdfunding investment is worthwhile and low risk.

Both investors and entrepreneurs need to be aware of regulations in regards to crowdfunding platforms. The Financial Conduct Authority regulate loan-based crowdfunding and investment-based crowdfunding. However, the authority does not regulate donation-based crowdfunding or pre-payment or rewards-based crowdfunding and so investors should take extra precautions when using such sites. It is therefore advised that investors ensure that they are aware of the risks involved with crowdfunding, including the risk of being scammed. Investors should ensure that they only invest money that they can feasibly afford to lose.

A recent equity crowdfunded report entitled Where Are They Now, found that greater transparency is needed in order to move forward whilst maintaining the trust and loyalty of customers. This report demonstrates that whilst crowdfunding is steadily increasing in terms of scale and popularity, there is a notable lack of a central resource by which past campaigns can be consistently tracked or reported which could be a problem long term.

Crowdfunding platforms are now working to ensure that this young industry remains sustainable and burgeoning as it expands. The report Where Are They Now has made a number of suggestions. These include:

  • information regarding company updates, failures and the latest company house information should be provided to subscribers in a timely manner;
  • platforms should freely advertise their track record; and
  • uniform standards should be introduced for reporting statistics.

The crowdfunding industry will not continue to escalate continuously at the current rate. However, this does not necessarily mean that there has to be an ‘almighty crash’. If caution is exercised and the major crowdfunding platforms work together to meaningfully address the concerns in question, then it is more likely that the industry will plateau as the growth evens out and the ‘faddish’ nature of the industry becomes the norm. This will have different implications for crowdfunding platforms, depending on their nature and scale.

According to Writer John Casteele: ‘It’s likely that Kickstarter will become somewhat of the eBay of crowdfunding being the largest and most well-known of the crowdfunding sites; it’s the most likely to survive crowdfunding’s shift from fad to status quo’.

As Europe’s leading provider of funding and policy information, Idox will continue to monitor developments within this area and offer the latest insight via its GRANTfinder and POLICYfinder services. For further details, please email grants.marketing@idoxgroup.com

By Julia Banim, Idox

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