It seems that everyone is talking about crowdfunding these days. Some articles have suggested that p2p lending is evolving into crowdfunding and that is the way of the future. I have also started to see a new term emerge: crowdinvesting, which is a new kind of crowdfunding. So, I decided it was time to tease these concepts out to see how they relate and where they are heading.
What is Crowdfunding?
Let’s start with crowdfunding. Simply put crowdfunding is just the pooling of money by individuals to support the efforts of a person or organization. The leader in this industry is Kickstarter, which really began as a way for artists to fund film and music projects, but has morphed now into a platform for any business to raise money. My local coffee shop in Denver just raised $15,000 for improvements on Kickstarter and I know several other businesses doing a similar thing.
Typically on Kickstarter and other similar crowdfunding platforms businesses offer rewards to entice people to fund their project. There are many different levels, usually starting pretty low ($10 or even less) and at each level the reward gets better. The project is on the platform for 30 days and it doesn’t end when the project is funded, it keeps going until the 30 days are up. So, occasionally when an idea goes viral you end up with a company asking for $100,000 and receiving over $10 million in funding like this new watch company who completed a wildly successful Kickstarter campaign last month.
Why Crowdfunding is not like P2P Lending
Crowdfunding is not an evolution of p2p lending; it is a completely different kind of vehicle. P2P lending is all about loans – an individual takes out a loan that is paid back over a fixed period. With crowdfunding no money is paid back because the individual or business is not asking for a loan. Usually what they are asking for is a donation that may be exchanged for some kind of reward.
With p2p lending investors want to see a return on their money. With crowdfunding people like to see the completion of a successful project and possibly some reward – such as a free cup of coffee or tickets to a VIP opening reception, as was the case with my local coffee shop.
Crowdfunding is about to change
Having said all that crowdfunding is about to change. With the passage of the JOBS Act earlier this year crowdfunding is going to get more complicated. Platforms like Kickstarter will continue to run donation and reward based projects as they have always done. In fact Kickstarter has explicitly stated that they will not be modifying their platform to incorporate changes introduced by the JOBS Act. These changes are all about allowing individuals to invest in small businesses by buying equity. This is really a new kind of vehicle and I think crowdinvesting is a good name for it.
While this is not an official term yet, I think we need to differentiate crowdfunding which is donation based from this new kind of fundraising that will be enabled by the JOBS Act. Soon, anyone will be able to invest in startup businesses and have a portfolio of investments similar to any venture capital firm or angel investor.
Small businesses will be able to sell up to $1 million in equity in their business to as many as 2,000 different people. Most importantly, these companies will be able to raise this money publicly and attract investors from people with small amounts of money to invest – as little as $100.
By the beginning of 2013 the SEC will have implemented all the rules for this new law and there will be a large number of platforms vying for the attention of the investing public. Already, several companies are in beta mode as they get ready for the gold rush: Wefunder, Earlyshares, Fundable and eRaise are just some of the companies readying for launch.
You Can Participate in Crowdinvesting Today
While these soon to be crowdinvesting platforms have great potential they are not allowed to take on investors until the SEC has ratified all the new rules created by the JOBS Act. But there is one company that offers crowdinvesting today – it is called Microventures. I first wrote about Microventures last year soon after they launched and they have grown tremendously since then. Right now, you have to be an accredited investor to invest but they have plenty of deals on their platform to choose from today.
The Bottom Line
For people interested in alternative investments there will soon be many choices. Traditional crowdfunding will continue to thrive I expect, but an entire new category will be created that I am calling crowdinvesting. Investors will be able to have a portfolio of small businesses they invest in as well as a portfolio of creditworthy individuals. As these different investment platforms mature I expect p2p lending will start to look like an attractive alternative. But that is a topic for another day.
What do you think? Are you interested in investing in startup businesses? Or will you stick to p2p lending. Please let me know in the comments.