Partner Article

Can crowdfunding destroy the banking system?

Internet crowdfunding – the raising of finance or resources for a project from a large network of people - is growing at an incredible rate.

It’s early days, but there have been a number of high-profile success stories in the creative media and technology sectors. In April of this year, a highly publicised Kickstarter campaign to fund a movie version of cult TV show Veronica Mars closed, raising $5.7 million - $3.7 million above the filmmakers’ target. In May, actor and director Zach Braff raised over $3 million to fund a follow up to his 2004 hit Garden State.

The figures behind the most successful crowdfunding enterprises thus far are staggering, made even more impressive by virtue of the relatively small investment made by the individual investors. The campaign for the Pebble smartwatch – a wristwatch that displays information from your mobile device via a Bluetooth connection - raised $10,266,844, pledged by 68,928 people, in a 2012 Kickstarter campaign, working out at approximately $150 per person.

Outside of consumer products and entertainment enterprises, the crowdfunding market for business finance, equity and loans is quietly making strides toward the mainstream. In the UK, sites such as CrowdCube, Seedrs and ThinCats offer a variety of options to start ups and small business owners looking for investment, financing or loans.

These sites are a tremendous resource to business owners struggling to find financing via traditional routes, but absolutely believe that their business idea is a winner. In the case of Crowdcube, the model allows anyone to buy equity in a registered business, allowing the business owner to bypass traditional lenders and pitch directly to the public.

Low risk

The advantages to both the investor and investee are clear to see. The crowdfunding model allows entrepreneurs access to equity without giving up any stake in the business, or acquiring any debt. The majority of investors know that most small businesses will fail, and with investment levels starting as low as £10, risk is considerably lower, giving investors the ability to spread their money across a number of businesses, an advantage that is even more pronounced in the crowd sourced loan market.

Such low starting numbers for investment also opens the doors to a potentially huge, untapped market of ‘armchair dragons’, looking to take their first steps into business, or those just looking for a hobby with a degree of financial reward. Research indicates that an emotional connection to a project is the key factor in this group’s decision to invest, and while it’s true that, like any business venture, crowdfunding relies heavily on the entrepreneur finding a gap in the market and promising to fill it, a great idea alone isn’t enough.

Crowdfunding - across all sectors - is as much an exercise in marketing as it is in innovation, as with any other method of securing capital, it’s as about how the proposition is sold as much (if not more so) than the proposition itself. A successful enterprise often plays on the emotions of a potential investor; but instead of a charismatic pitch man providing a product demonstration a room full of bankers, modern technology is used to create a sustained, non-intrusive campaign that can hit millions of potential partners.

Stunning, inventive, professionally-produced pitch videos are the cornerstone to most crowdfunding campaigns, and social media outlets are utilized to create buzz, sustain interest and build a pre-customer loyalty.

In a 2012 speech in New York, Andy Haldane, a senior policy maker for the Bank of England suggested that crowdfunding models could render traditional lenders obsolete: “With open access to borrower information, held centrally and virtually, there is no reason why end-savers and end-investors cannot connect directly,”

There is scepticism, and rightly so, crowdfunding on this scale is young and relatively untested, but the impact could be revolutionary, as Haldane pointed out, “At present, these companies are tiny. But so, a decade and a half ago was Google. If eBay can solve the lemons problem in the second-hand sales market, it can be done in the market for loans”.

This was posted in Bdaily's Members' News section by BusinessesForSale .