- Category: Crowdfund Investment
- Published on May 08, 2014
- Written by Jason Best
What a difference a year makes. The 2014 LendIt conference had nearly 1,000 attendees and 100 online lending companies represented in the space – nearly 4 times the 2013 event. What was also interesting is that over 50% of the attendees classified themselves as professional investors. While there were many interesting speakers and sessions (LendIt will make these available online soon), here are three of the topics that garnered a lot of interest at the conference:
- P2P is no longer an accurate label/descriptor for onlineNew players and verticals have emerged in the space. Financial institutions are rapidly entering and helping lending platforms achieve scale. As such, P2P is no longer an accurate title. During a presentation on the $1 Trillion dollar market size of this industry, Charles Moldow, of Foundation Capital, suggested using “Marketplace Lending” instead of P2P lending to better describe the phenomenon because it is a new online market with many types of participants to source and use credit products. This is the term I will use going forward to describe this market.
- This is not a winner take all market (Amazon), nor is it a free-for-all (Groupon). While there will be consolidation in the market, unlike Amazon in e-commerce, there will an ecosystem of funding sites that will continue to exist andThis is due to the high barriers to entry in the market including regulatory burdens and scale required to break even. Several speakers indicated that platforms needed to reach at least $1B in origination to reach break even.
- The UK and German marketplaces continue to experience massive growth and are interesting to watch for lessons learned to apply in other markets. While the traditional lenders largely ignore them companies like Funding Circle, Ratesetter, Assetz and Zopa, continue to experienceThey are seeing more than twice the annual growth in loan originations, while maintaining default rates of between 0.7%-1.7%. While these platforms began as peer-to-peer or peer-to-business lenders, they now (to varying degrees) are seeking institutional capital while they scale up inventory and operations. Also, unlike some of the marketplace lenders in the US, they cap their gross yields at 12-15%. In the case of Funding Circle, the SME lending platform, the UK government continues its program of co-investing in certain loans to UK businesses as a way to support lending to SMEs that traditional banks continue to refuse to do.
A year from now, it will be interesting to see the developments that will have taken place in this market, the development of secondary markets, the securitization of these loans, the globalization of platforms and the development of an ecosystem of companies that will support advances in underwriting, due diligence and transparency. If the marketplace lending space were a 1000 page novel, I’d say we were only at page 70 today.
- Category: Crowdfunding Platforms
- Published on April 28, 2014
- Written by Jason Best
During Jason Best’s recent visit to Romania as part of a US State Department mission, he met Crestemidei, one of three Romanian Crowdfunding Platforms. This women-led team has been doing pioneering work and we asked them to write a guest post, which follows. This is an example of hard work and early traction. If you are creating new crowdfunding platforms or services and have stories to share, please send them to us.
Crestemidei.ro (wegrowideas.ro) is a Romanian crowdfunding platform based in Cluj-Napoca (the so called Sillicon Valley of Transylvania) set up by 3 young women and launched on December 2012. The idea behind it all was to turn innovative and creative ideas that generate benefits to community into reality – the motto is ‘We change Romania for the better, idea by idea!’
To test the concept and to collect the funds needed to come up with the platform, the founders ran their own campaign on their own platform (beta version of crestemidei.ro at that time):
- The financial goal of the campaign: 1000 EUR in 28 days.
- The outcome: 41 Romanians (Honorary Founding Members) contributed with 1076 EUR - enough to launch the platform and create the basis for an innovative start-up in Romania.
It was probably the only crowdfunding platform in the world to be launched through a crowdfunding campaign which provided credibility and first hand experience with implementing the concept in a new market and laid the foundation for the growth of the industry in Romania.
Crestemidei.ro is a fixed funding and reward-based crowdfunding platform, and the team applies selection criteria before publishing the campaigns (innovation and positive impact in community, financial goal, project team expertise). Anyone can finance innovative projects borne in Romania from 17 domains ranging from writing&publishing, theater to technology, environment, health.
Few key figures (valid as of April 2014):
- 24 campaigns on the platform: 3 active, 11 successful, 1 campaign was purchased entirely by another company and 9 were unsuccessful
- Projects’ financing rate: 55%
- Aprox 14.000 EUR worth of donations
- No. of contributers: > 600 (2013)
- Unique vistors: > 50.000 (2013)
The founders are:
- 1.Catalina Amihaiesi - http://www.linkedin.com/in/amihaiesicatalina
- 2.Oana Man - http://ro.linkedin.com/pub/oana-man/0/783/955
- 3.Judit Katona - http://ro.linkedin.com/in/juditkatona
The team also includes Oana Rus, Projects Coordinator, and Catalin Vasile, business angel.
- Category: Crowdfunding Platforms
- Published on April 15, 2014
Recently, the CCA Group performed an audit on the crowdfunding ecosystem in the United States. Speaking with industry experts, performing original research, and updating
a database of all active and inactive crowdfunding portals in the country, we were able to develop a “30,000 foot” view of the ecosystem, including a closer look at the types of platforms in the space (e.g. lending, reward, equity, etc.), the verticals (e.g. business, non-profits, etc.), and comparative social metrics. In this post, will take a look at three takeaways.
Niche Plays Tend to Survive
Business programs around the world often teach that startup businesses who identify and exploit a niche have a much higher chance of surviving. In their paper New Firm Survival: Industry, Strategy, and Location, authors Sterns et. al. write “niche purveyors were found to have increased survival chances” and from our initial analysis, this rings true among crowdfunding portals in the United States. When looking at the failure ratio of crowdfunding platforms by vertical, those platforms that could only be described as crowdfunding for “everything” had a 48% chance of failure. That is, of the platforms from our previous database and with the new platforms our team was able to identify, 48% of the platforms that were set up to fund “everything” were no longer active as of the time of this study. Conversely, though there are a few funding portals that focus exclusively on environmental causes, all of the portals that we’ve been able to find in this vertical are still active. See figure 1 for a breakdown of the failure rates of US funding portals by vertical.
Funding for Businesses is a Crowded Part of the Ecosystem
Our study breaks the ecosystem down into seven verticals: everything, nonprofits and causes, creative, environmental, businesses, science, and other. Of course, these verticals are somewhat imprecise and the classification of an individual funding platform into one of these categories involves some subjectivity on the part of the researcher. Nevertheless, one striking takeaway from our study is that the space for business funding platforms is crowded. Our study found that the “business” vertical had more than double the number of platforms than the second-highest category: non-profits & causes. On the opposite in of the spectrum, the least crowded parts of the crowdfunding ecosystem in the United States are funding platforms that focus on science and environmental issues. See figure 2 for a visual representation of the crowdfunding ecosystem in United States by vertical.
The Major Players Have all the Social Proof: a Natural Oligopoly?
When our team looked at some of the comparative social metrics between platforms in United States, we were struck by the presence of outliers. Looking at the descriptive statistics (see figures 4 and 5) of the active platforms that have at least one “like” on Facebook, the kurtosis (a measure of skew) is enormous, signaling that the distribution of these data is nowhere near normal. The same can be said for the audit of these platforms’ presence on Twitter. Instead of a somewhat normal distribution, there are a few players in the top quartile that dominate the crowdfunding presence on Facebook and Twitter. This is an important consideration given the impact that social proof has. It builds trust, attracts funders, and attracts campaign managers. This may not surprise many of the readers of this piece because a couple crowdfunding portals are becoming household names and others remain relatively obscure.
In his paper Supermarkets as a Natural Oligopoly, Paul Ellickson of the University of Rochester describes the “size of the store” as a factor that drives the success of few firms in the supermarket space: “The oligopolistic chains do not carve out separate turf, choosing instead to compete head to head with their rivals, with choice of store size behaving as a strategic complement. No other theory seems capable of explaining these facts.” Interestingly, he believes that this idea is not unique to supermarkets, but applies to many retail verticals saying, “the same features seem to characterize modern retailing in many arenas.” Could it be that a crowdfunding portal shares economic similarities with large brick and mortar retail spaces? If so, that might be a strategic lighthouse for portal owners.
Written by Davis Jones for CCA
- Category: Crowdfund Investment
- Published on March 31, 2014
- Written by Jason Best
Last week Facebook announced it would acquire Oculus Virtual Reality for US$2 billion. 18 months earlier Oculus used crowdfunding platform Kickstarter to raise US$2.5 million from supporters. Unfortunately, none of those backers were equity holders. Owning equity in Oculus wasn't an option for these supporters because the JOBS Act, which was signed into law in April, 2012 and legalizes the ability for companies to use crowdfunding platforms to sell debt or equity, hadn't gone into effect yet. (It still hasn't 2 years later). Outside of Kickstarter however, there were some seed investors that were able to invest in Oculus at a $2.5M valuation. So you can understand why there are some pretty upset Oculus Kickstarter backers whose dollars didn't earn them an 800x return like the investors but feel they are partially responsible for the success.
This is not another rehash of the Occulus acquisition by Facebook. I am only focusing on one thing; misdirected anger. Occulus and Kickstarter did exactly what they offered in their kickstarter campaign. They didn't create the laws that prevented people from investing in private companies unless you are the wealthy 1%. They also didn't create the laws that made it illegal to use kickstarter-like platforms to raise equity for a business until the JOBS Act goes into effect.
It is time to stop directing their anger at Oculus or Kickstarter. Instead, supporters should shift their dismay to the group that prevented them from making an investment in that company (that had the chance to reap a financial gain in the process) in the first place: The Securities and Exchange Commission (SEC). If the SEC had moved faster to write and approve the rules for equity crowdfunding for unaccredited investors (a.k.a. the vast majority of people living in the U.S.), then Occulus could have made the decision to raise money via either equity or debt crowdfunding (likely equity since it had no revenues or prospects for very near-term revenues to support a debt repayment). IF they had made this decision to raise money via equity crowdfunding and IF individuals made these investments, they would have reaped the same rewards as other stockholders with the same class of stock.
My point in not to say that everyone is going to get rich on investing in startups. My point is that if the SEC had moved more quickly in their rule making progress (remember, it is now 2 years since the President signed the bill), tens of thousands of businesses and startups across the US could have had new options to consider in raising capital for themselves. This would have created more jobs and innovation for our economy and potentially other companies that might have created a financial gain for their investors. Not the "truth is stranger than fiction" type of returns Oculus delivered, but returns (via equity or debt investments) none the less. Let's congratulate innovation and hard work and let's direct the frustration with the inability to make investments in startups and private companies, at those that can can help alleviate it.
If the SEC will move forward and issue final rules that provide companies with the opportunity to raise capital, other companies will have a shot at building their vision and regular investors will have the chance to be a part of it if they choose to be.
PLEASE NOTE: It is entirely unlikely and insanely rare for a company to sell for $2B in less that 2 years (or ever, for that matter). Historically, most startups fail and historically, most people who make investments in early stage companies or small businesses loose money. Making investments in startups and small businesses is very high risk and if one chooses to make these high risk investments, they should be limited to a very small percentage of their total portfolio.
- Category: Creating a Global Framework
- Published on December 17, 2013
- Written by Sherwood Neiss
The future of Impact Investing and Crowdfunding was on display in Nairobi, Kenya last week. At the World Bank/infoDev’s annual funding meeting their budget was divvyed up among the creation of Climate Innovation Centers (CIC) in Kenya, Ethiopia, South Africa, Vietnam and the Caribbean and new funding mechanisms to allow the Bank to effectively seed innovative via crowdfunding.
CIC’s are incubators training impactful, locally sustainable technology companies. Examples include a biofuel gas stove company that can reduce carbon emissions and black smoke disease and a household filtration system company that recaptures and recycles water allowing women to perform their duties while saving them hours from painstakingly carting water jugs on their shoulders.
The new funding mechanism, called crowdfunding, will use the Internet, technology and the social network to connect would-be entrepreneurs with diaspora money. It will allow investors anywhere to identify a wellspring of opportunity in emerging markets, fund their entrance into incubators, and seed them with capital. The CICs will provide training in management, operational and financial systems, procedures and controls. They will also teach entrepreneurs how to broaden their fundraising efforts via crowdfunding to solicit future growth capital from investors who share similar communities and homestrings. These investors won’t be traditional institutional investors but Africans, Asians and Carabineers who live abroad and wish to remit funds into these investment opportunities from their sofas in Detroit, Michigan or London.
Crowdfunding isn’t just a fad, it is turning out to be a powerful tool to democratize access to capital globally. Research conducted by the University of California, Berkeley shows that funding by the crowd operates in a rational manner (eg: no hype), removes the stickiness of the process (eg: brings documents online, allows multiple parties to diligence and vet at the same time, and facilitates the immediate transfer of information and cash). The industry which only started to gain traction in 2009 is already a multibillion dollar industry that consists of entrepreneurs, fundraising websites, ecosystem players that provide vale added services and of course at the center investors.
For the CICs and other considering this path the next steps are creating education, training and a funnel of opportunities. This requires the connection of stakeholders in the private sector who focus on teaching entrepreneurship and merging those principals with crowdfunding and accounting. The stakeholders include organizations focused on building entrepreneurial capacity, crowdfunding education companies and tools that facilitate the accounting of businesses and their structures and processes. Sherwood Neiss of Crowdfund Capital Advisors says, “This fits perfectly with our firms capabilities. Our principals are all successful entrepreneurs, who have raised millions of dollars in the private capital markets, hosted successful crowdfunding campaigns and wrote the framework for the crowdfunding law.”
Crowdfunding solves pressing problems for both NGOs and developing world entrepreneurs. It answers the question, where do I find capital? It makes the impossible possible. It provides a continuum of funding and community engagement from product to process. And allows investors to enjoy the greatest opportunity for economic value, which is created at the inception and historically limited to the very few.
But crowdfunding doesn’t come without risks. And these risks (lack of oversight, regulation, & policy) can be greater in the developing world. There are ways to mitigate this risk. It begins with standardizing the process, coming up with a standard disclosures, connecting these ideas to co-working spaces, incubators and accelerators that are sponsored by trusted brokers like the World Bank and regulating all this online, via websites that are registered and tied into reporting systems where investors can see how their money is being spent.
In doing so the perennial question of trust and accountability are answered. This is about creating a value chain of opportunities and allowing investors to put their money where their mouth is. Businesses that are successful may not only have access to capital, but strong local resources to guide them and a distribution network of customer and investors for their product.
Not only are these technologies sustainable but the process by which they are funded is efficient. Consider electricity. There has been a movement in the developing world to decentralize and promote off-the-grid technology that create mini grids. Rather than using mega public funding to finance nationwide electrical infrastructure that take decades and billions, we may now use crowdfunding to create mini funding events and have an impact almost instantly and at a subfraction of the cost. And by narrowing the funding target business models are promoted that are appropriate for a particular village or region rather than tackling national issues.
As countries move from donation or perks based crowdfunding to debt and equity crowdfunding policy will need to be addressed. The financing policy environment will be extremely important. Policy controls whether companies can succeed. Where they can do business and how much they can charge for things like electricity. Policy needs to be enabled that allows these crowdfunding ecosystem to flourish. This was the subject of the World Bank’s report Crowdfunding’s Potential for the Developing World.
With $60B in remittances already flowing into Africa a year but often times being immediately spent for goods or safety concerns over hording cash. Crowdfunding may allow diaspora communities to engage directly with locally sustainable businesses that are having an impact and creating jobs and economic prosperity. Crowdfunding will address the gender inequality issue as more female investors back more female entrepreneurs and promotes economic inclusivity particularly for parts of the work that historically have been called “the bottom of the pyramid.” The time is here, the World Bank is taking the next steps. What is your country doing?