Open Capital Review (PART 1): Crowdfunding & P2P Lending

In my mind crowdfunding has two sides; one is purpose based (simply for project realization, rewards or charity only) the other purely financial (for interest on debt provided or equity only) and with a hybrid area in between. You could argue that as the market grows with tens of thousands of crowdfunding opportunities, you will always have the choice to make a purposeful investment… but it is undeniable that unlike the early pioneers for today’s majority. ‘making money’ is their primary if not their only intention.

However you look at it, crowdfunding is beginning to be taken seriously by national Government’s who have set about regulating their local markets to both protect unsophisticated investors from what most Perceive as disproportionately high risks and direct focus towards the parts of their economies that they believe need it most. Whilst slightly politicized, regulation is mostly focused on the practices and liquidity of the platforms themselves, like any other financial institution, with the UK’s Gov’t being largely recognized as the more liberal and innovative in approach. This was expedited by the UK, it being one of the first markets to allow equity-based crowdfunding, ahead of the larger US market which erred on the side of caution with the Jobs Act, as well as the more favourable tax break incentives for angel investors, such as EIS and SEIS, already being in place. Some countries, like Italy, have restricted the type of company that can raise money through equity based crowdfunding, to more directly influence the part of the economy that accesses stimulus.

One thing is for sure, crowdfunding will replace the traditional high-street bank lending process to SME’s in the not too different/distant? future, as most banking institutions look to remove the risk altogether from their books.  However, it is estimated that more than 60 per cent of the loans on P2P Lending Platforms in the UK are funded by institutions and not by small investors, with a number of more forward thinking banks looking to tap in on the platforms efficiencies.  Santander UK has been in discussions with ‘Funding Circle’ and this would allow the Spanish owned bank to lend alongside the peer-to-peer platform’s depositors on larger loans. It is expected to be launched at the end of 2014 and to allow Santander a route into the emerging p2p and small business lending market which has been targeted as a key growth area for the bank.

Traditional VC seed investing also looks slow, onerous, expensive and altogether, increasingly less attractive when compared to the speedy crowdfunding process. It looks likely it will either move down the timeline of the growth cycle or become more specialist for high growth tech based businesses.

The important questions are more about how directly Gov’ts will try to influence this new form of market stimulus by the types of businesses or sectors that can access it. The UK Gov’t once again, seems to be ahead of the curve by recently passing on providing the banks themselves with cheap debt, as they have done for years now, and invested £40m directly into one of the local crowdfunding platforms and with a further £60m on its way without any real conditions.

For the purpose based crowdfunding model the biggest event was Oculous Rift. Oculous Rift sold to Facebook for $2 Billion without ever realizing its promise to its backers. This has brought into question the model of its most famous platform, Kick Starter, and the morality of breaking your commitments to early supporters.

Considerations:

What is the future of Purpose Based Crowdfunding? Will the Oculous Rift event and the increasing opening of equity-based crowdfunding challenge the dominance of the KickStarter Model, or will a hybrid model emerge?

Personalisation or Automation? Will p2p lending continue to take a more social & personal dimension, or will it become more anonymised and automated?  Peer-2-Peer lending is nothing new; Credit Unions, a form of Common-Bond Financial Co-op are big business in the US, LAT AM and Asian markets, but have been slow to digitize. With them they bring hundreds of millions of small lenders and trillions in funds. So the question asked is, should they choose to integrate into online crowdfunding platforms or should they leverage the technology they offer with a huge injection of members whilst also bringing with them powerful purpose and a social lending component?

How will Governments interact with the Crowdfunding Market? I don’t think anyone can argue that Governments are already seeing crowdfunding platforms as a more effective channel for SME stimulus than the high-street banks, they’ve been pumping cheap debt into them for several years now. But how will Governments look to leverage crowdfunding as a means for economic engineering?

Will more crowdfunded businesses add to or remove heat from the tech ‘bubble’? With greater participation of customers / small investors and lesser involvement of VC’s, will the focus shift away from quick exit / big flotation to longer and more sustainable growth? Will the appeal of stock-markets as a means of financing a business lose its appeal altogether; given a more aggressive investing environment where share prices can go up and down dramatically and this frequently based on external factors?

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