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The More the Merrier?

October 9th 2015

Crowdfunding is clearly on the rise, with total equity raised growing at 1.6X per annum.  Within this, there are various engagement paths, including early product downpayments, peer to peer lending, donation and equity.  Of these, equity participation is expanding the fastest, at 2.5X per year.

Depending on where you look, you could think that variously Krowdster, CrowdsUnite, Kickstarter, Indiegogo and GoFundMe are the places to go to.

One of the main characteristics of crowdfunding is the widening of the investor base.  Investors are getting younger – 44% of UK crowdfunding investors are under 45.  More women are participating (20% of investors are female and this share is growing) and more funders are starting with crowdfunding (59% have less than 5 years of investment experience).

Further, the crowdfunding model encourages a greater number of investments.  The median investments per active investor has risen from 2.5 in 2008 to 3.4 in 2014.

From the company perspective, crowdfunding can provide an access to capital that may otherwise be denied.  The sector is certainly attractive to many early stage companies, especially if they are b2c businesses and can see their investors and customers as the same set.

In the UK, the crowdfunding sector is dominated by Crowdcube at over 78% of the market, with others like Seedrs expanding, partly through a £10M equity raise themselves.

However, underneath the gloss, there are issues.  80% of companies fail to make their target raise.  Further, the average successful raise is less than £50k.  Only 1 in 5 UK business investors use crowdfunding.

There is also the danger of a bubble emerging.  The average time to exit from investment for an angel investor is 4.4 years, so the great majority of crowdfunders have yet to see any return.  And this immaturity may be why you don’t see crowdfunding sites advertising their average returns – it’s just too soon.  Hence they compete on size or features.

What’s more, review sites are emerging, using softer metrics and user experience ratings.  And as we know, user testimonials can be tricky.  Tripadvisor has run in to problems and Amazon now is using artificial intelligence to combat fake product reviews and inflated star ratings.

You may have thought that astroturfing had something to do with stars on a football pitch but it now refers to fake, inflationary ratings campaign.  Let’s hope the crowd knows better.

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