Disruption is a term closely associated with crowdfunding, and it’s not necessarily a bad thing. The advent of crowdfunding has definitely changed the face of investing in more than one industry. For example, real estate crowdfunding has brought increased transparency into investing that wasn’t there before. In terms of monitoring investment progress, the updates available on online platforms have become frequent at best. Investors now have the ability to view their holdings online and see how well they’re doing in the market.
Apart from transparency, different forms of crowdfunding have also infused a whole new level of accessibility into the market. No longer do entrepreneurs and small business owners have to wait to market their products to a wide segment of the public. As the industry continues to progress, it also brings to light the considerable evolution of crowdfunding.
The term ‘crowdfunding’ has been exclusively associated with putative payments to fund tangible products. In the recent months, equity crowdfunding is proving especially attractive to small business owners and startups.
According to the annual Massolution Crowdfunding Industry Report, the total equity crowdfunding volume worldwide in 2015 peaked $2.56 billion. The number is expected to triple in 2017 and will be roughly in the neighborhood of $4-5 billion.
While venture capital investment holds a steady $30 billion per year, equity crowdfunding is expected to surpass angel capital by 2020. According to the World Bank, the crowdfunding market as a whole will hit $90 billion in volume by 2020.
In the past, equity crowdfunding was reserved for accredited investors with over $200,000 a year income or those who are worth over $1 million. This changed when former President Obama signed the JOBS Act four years ago, and the U.S. Securities and Exchange Commission take the limit off equity crowdfunding. As per the rules, startups can sell up to $50 million worth of stock online in a 12-month period to anyone who is willing to investment, opening the door for small businesses like family-owned shops and restaurants to raise funding.
The SEC’s latest ruling allows startups to raise money quickly. But, at the same time, equity crowdfunding raises a lot of alarms. There is a greater need for equity crowdfunding campaigns to disclose information, including financial statements, tax returns, and how businesses determine the price of the securities sold.
The launch of Crowdemand, Inc., has got crowdfunded fashion shopping up and running. Generally, retail manufacturers and fashion designers must secure private funding or foot the bill to bring a design to the market. If the design flops, they’re left on their own to recoup the cost.
Crowdemand offers exclusive designs from fashion designers and manufacturers for pre-order at a 50 percent deposit up front. The customers pay the remainder once the designs are completed. With retail crowdfunding, designs can test the popularity some designs, and secure funding without having to recoup the cost.
Its inaugural designer, Cynthia Rowley kicked off the partnership, followed by Whit and Meskita. Currently, the offerings are limited from $250 to $2,000 and are smaller in variety than what you may find on major shopping sites.
Crowdemand co-founders Marat Stary and Liat Cohen started the fashion-powered platform out of their shared love for fashion. Designers can post their creations on the platform during a two-week campaign, allowing customers to pre-order the items they want.
With the launch of crowdfunded insurance by American International Group, we saw the first of kind in the crowdfunding industry. Currently, AIG only sells coverage on the platforms, however, it is soon poised to offer insurance protection to all investors using the platform. AIG’s success has brought more crowdfunding insurance players into the market, starting with large-scale equity fundraising projects.
Crowdfunding has exponentially changed real estate market, too. In the past, the commercial real estate industry was reserved for investors with millions of dollars to develop apartment complex, storage unit facility or a strip mall. With real estate crowdfunding on sites like RealtyMogul.com, anybody can raise more than $200 million to crowdfund a real estate property. A lot of investors are using such platforms to browse for debt or equity investments, invest online and track their performance.
While corporate crowdfunding is still an unexplored concept, in the last several years, it has seen entrepreneurs fund their prototypes to bring their products to the market. Pebble E-Paper Watch Kickstarter campaign originally started out as a corporate crowdfunding initiative, raising $10,266,845.
Today, corporations are leveraging the unique platform to raise funding for creating prototypes as well as research and development.
Not so long ago, Indiegogo announced plans to market its own crowdfunding platforms to major companies. It aims to help companies crowdfund their research ideas through public validation before the products hit the mainstream. Currently, the new crowdfund platform is only open to Fortune 1000 and Global 500 companies.
Similarly, IBM has developed its own crowdfunding platform called iFundIT, through which employees in the IT department can develop and pitch potential projects on the company’s internal social network. Employees are given up to $2,000 of IBM money, which they can use to promote their products.
It’s unclear how quickly entrepreneurs and micro-businesses will adopt these models. Existing platforms will face fierce competition from newcomers as they respond to the demand. These models are not just a viable alternative but will also disrupt the funding process in years to come.