Understanding Crowdfunding And Emerging Trends
By MARIANNE HUDSON for Forbes
The word “crowdfunding” gets thrown around these days like a baseball on opening day. Regardless of its many nuanced pedestrian uses, angel investors and others need be clear about two things: how to apply crowdfunding to their investment strategies and understanding emerging crowdfunding trends.
Let’s start with a quick crowdfunding primer. There are several kinds of crowdfunding and the distinction isn’t always clear. The concept of crowdfunding started gaining traction in the US three years ago when Congress approved the Jumpstart Our Business Startups (JOBS) Act, aimed at creating new ways for investors to fund startup businesses.
Since then things have settled down and become clearer. I break down crowdfunding into three simple categories:
- Reward/donation: In return for a donation from fans of a project, a business or non-profit provides an incentive. This $10 billion worldwide market includes players such as Kickstarter and Indiegogo and allows pretty much anyone to seek funding from anyone else.
- Lending: This includes peer-to-peer lending or credit sites such as LendingClub, which help connect borrowers with lenders over the internet for personal or business loans.
- Equity crowdfunding: This breaks into two pieces.
- Accredited platforms, which are available only to accredited investors. These includeAngelList, FundersClub, Onevest and SeedInvest, with many more coming online. More than 50,000 angels are members of these platforms. Many of these sites don’t consider themselves to be “crowdfunders” and instead use the term “accredited platforms” to reinforce the fact that they’re only open to accredited investors and have sophisticated investing processes, decision-makers and investing processes.
- Equity crowdfunding by anyone, accredited or not. The JOBS Act calls for this kind of crowdfunding across the U.S., but the SEC has not yet published rules to make it happen, at least for true startups. Wanting to do something, several states that have approved equity crowdfunding for unaccredited investors within their state boundaries.
With that primer, angel investors and others need to consider how to incorporate crowdfunding into their investment strategies. Fortunately PENSCO Trust Co., a self-directed Individual Retirement Account custodian, recently released a report titled“Crowdfunding Redefined”. For the report PENSCO gathered insights from various crowdfunding sites, and uncovered four key trends driving the industry today:
- Investment in and access to private equity are growing rapidly. The JOBS Act enabled and inspired new funding models, which have led to these new crowdfunding opportunities, including private equity investing by unaccredited investors and peer-to-peer lending for all investors.
- The variety of opportunities available to investors is increasing. Through online platforms, accredited investors now have access to a myriad of assets and sectors.
- There is an increased call for transparency and communication. Equity crowdfunding is gaining popularity and interest among investors, which means that issuers are increasingly being asked to provide a level of transparency and communication that is more like a public company than a traditional private placement.
- Institutional grade information and deals is increasing. The combination of transparency and access means that online platforms are beginning to provide individual investors with institutional grade information and deals, allowing those investors to also use private equity and debt to diversify their portfolios.
The PENSCO report inspired me to dig deeper to see what else I could learn from accredited platforms. As an investor in Portfolia, a new accredited platform for women investors to invest in women-led companies, I turned to founder and Chief ExecutiveTrish Costello to understand the trends she is seeing. We agree on several:
- Accredited platforms are becoming better at connecting people, including help investors meet lead investors. Potential investors are finding each other through social media sights such as LinkedIn and are getting to know each other as investors.
- Platforms are building their investment process capabilities, including due diligence. Potential investors can go to “deal rooms” to learn from each other and easily look up information about companies they may want to invest in.
- From an overall sense of crowdfunding, including Kickstarter, more women are becoming funders. For example, Indiegogo has had many success stories with women-led projects because women tend to know a lot about consumer products, which are involved in many of the crowdfunding opportunities on this site. Such crowdfunding opportunities also fit in with women’s schedules. They can get online at any time, fitting their time for research into everything else going on their lives, including work and family. It works for them to learn online about making smart investments without having to go to meetings with mainly men, who sometimes can be intimidating and make them feel uncomfortable in the investment world.
- Donation crowdfunding has created significant interest and has helped a lot of people, women included, to understand how the basic contribution works. That then makes some of them more comfortable making equity investments. For a lot of women, there’s a lot of fusing between philanthropy and angel investing. They learn from doing one and then carry those skills to the other.
Yes it’s a new world and there’s a lot to take in. One thing is for sure, crowdfunding – in its many forms – is here to stay. I urge you to learn more – and to stay tuned as this type of funding evolves.