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State of crowd funding "very immature and highly fragmented"

16 Aug 14

As promised though a bit late, I have now analysed almost 50 leading crowdfunding sites. My overall view is that crowdfunding is in a very early and fragmented state.

I won’t call this a multi-part post but will continue to post on my findings and will continue regularly examining more sites.

Here are my initial findings. I recently published on these findings with recommended actions in Gartner’s Hype Cycle for Social Software, 2014 (available only to Gartner clients.).

I estimate there are at least 1,000 crowdfunding sites in the U.S. and hundreds more in Europe and Asia. Most with very little activity. Across these sites are a multitude of fund raising models, business models and user experiences.

Literally, it seems that every site has a different funding model and process. The market is in search of business and funding models that will work for the masses.

We expect it will take a significant number of years, starts, failures and restarts before crowdfunding begins to significantly impact the financial industry.

This early stage is evident in its portion of the financial markets. We estimate, based on the number of sites and fund raising trends, that crowdfunding in its entirety has globally raised less than $100 billion.

While this seems like a significant amount of money, compared to the $200+ trillion global capital markets (stocks and bonds) it is a rounding error. JPMorgan Chase alone holds, in assets, over 25 times the total amount of funds raised to date through crowdfunding.

Crowdfunding’s hype primarily comes from the media, and has not yet significantly spread to either the consumer or business worlds.

The hype is based on imagining crowdfunding’s potential to disrupt current models for raising money. There are some very interesting and inventive models emerging that do stimulate visions of a world with very different financing opportunities.

Because crowdfunding is so broad, it is beneficial to examine two separate categories, since they move at very different rates, are at different levels of maturity, and have unique opportunities and challenges. I’ll call these categories return-based and reward-based.

With return-based crowdfunding (such as Lending Club, Prosper, EquityNet and Fundable), the contributors expect a financial return on their investment

This return may stem from debt interest payments, equity, profit sharing or other financial instruments. Return-based is growing slowly, primarily due to government regulations which restrict investing.

Yes, the U.S. Jump-start Our Business Startups (JOBS) Act of 2012 will relieve some of the restrictions over time, but right now, investing is generally restricted to Accredited Investors (people who earn over $200K a year or have net worth of over $1M excluding value of primary residence).

Accredited Investors make up about 1% of the US population… hardly the crowd. Other restrictions limit how many investors are allowed, and what they can contribute.

As well, certain local governments have participation restrictions. All these restrictions currently keep the crowd out of return-based crowdfunding. Trust and user experience also stifle growth. This will be the case until larger numbers of contributors can invest smaller sums of money.

This is the promise of the Title III “Crowfunding Exemption” portion of the JOBS ACT of 2012 (currently pending SEC implementation rules) that doesn’t restrict who can invest but how much they can invest in any one year.

To top it all off, the current user experience in almost all the sites I’ve examined is uninspired and all but ignores the wisdom of the crowds.

Bottom Line: The 3 things required for crowdfunding success including masses of people participating and investing small sums of money in an easy and even fun experience are all missing from return-based crowdfunding. In other words, there is no crowd in return-based crowdfunding.

Reward-based crowdfunding (such as Kickstarter, Razoo, RocketHub and Indiegogo) is where crowdfunders receive a nonmonetary gain from their financial support.

This reward can span the spectrum from the emotional reward of giving, to status in the crowdfunding community, to trinkets, to valuable physical goods and services. Reward-based crowdfunding is more mature than return-based.

No monetary return means fewer restrictions. Currently, crowdfunding platform fees are hindering growth. It isn’t unusual for crowdfunding platforms to charge 6% to 12% of funds raised, between service and credit card fees.

Regardless, this segment of crowdfunding is growing steadily both in number of sites and in funds raised.

One very interesting aspect of reward-based crowdfunding is pre-selling. For example, one reward-based crowdfunding approach is to basically sell the product in the pre-production stage.

Say a company needs $1 million to build and release a product. It could offer a reward of one product for every $25 contributed. So, in effect, it is setting a $25 pre-order price for the first 40,000 units of product. This will be a consumer products funding model to watch as reward-based crowdfunding grows.

BTW, I purposefully left off a category that is often included in crowdfunding but I don’t consider crowdfunding.

For example, Sally Peopleperson wants to raise $2000.00 dollars to send her daughter to Italy for a semester abroad experience. So she reaches out to her network on a site like Gofundme.com.

This is less crowdfunding and more friendsandfamilyfunding. If you have a personal relationship with the crowd is it really a crowd? A little philosophy for you.

I obviously have not covered it all here but my writing and your reading attention span is not boundless. More details to come. I’ll be more regular in my posting now that I’ve completed an initial examination.

I’d love your comments, insights, broader view, etc. Help meeeee help youuuuu :-)

By Anthony J. Bradley - Analyst, Gartner

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