Can You Lend Me a Buck?

by | 19 May 2015

Got a great idea? Need a loan? Well, speak to your bank manager. Or should you speak to your computer?

It can’t be missed: There is an ever growing demand for money to be either invested or borrowed in an economic environment that penalizes savers and investors.

So, what do markets do when faced with restrictions? They evolve and realign to match demand with supply. This desire to realign has triggered a revolution in banking, investing and donating money — collectively known as crowdfunding. Put simply, it uses technology to bring those who want to invest money together with those who need it while cutting out the traditional middle man.

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Historically, crowdfunding — as a means of financing a business – has been rare or seen as a novelty when compared to the traditional routes such as bank loans, venture capital and borrowing money from friends and family. Today, announcing your crowdfunding campaign is just as common as any of these options, and it is booming. Investment has been growing at over 100 percent per year.

Just how big is this new route to capital? Based upon trends from the past three years, the total value of crowdfunding transactions globally is expected to reach $20 billion in 2015. This represents a 100 percent increase year-over-year from $10 billion in 2014, $5.1 billion in 2013 and $2.6 billion in 2012.

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Estimates from a variety of sources indicate that the yearly total market potential of the entire crowdfunding industry could average around $300 billion by 2025. This is being driven by an ever growing need of funds to fuel creativity, and entrepreneurial and philanthropic endeavors that traditional institutions cannot value due to risk restrictions or ignorance and laziness.

This begs the question: How much of a risk is crowdfunding to traditional institutions? Are we hearing the bells of doom for high-street banks? The answer is that it is a good start. But even by 2025 projections, crowdfunding will deliver $300 billion — which is only 1 percent of the $30 trillion held in the U.S. as long-term investments alone. It is a minnow, but it has clearly opened up new markets for individuals seeking small sums; the average amount raised (in the UK) for an equity campaign (where you acquire a percentage of the business) is £174,286.

The UK has always led the world in terms of products and government support for the Financial Technology (FinTech) sector — from mini bonds, convertibles, REITs and ISAs. The government encourages saving and investment with preferential zero tax saving schemes such as ISAs for cash or equity investment. Crowdfunding schemes may be absorbed, too. The UK market more than doubled between 2013 and 2014 (from £666 million to £1.74 billion) with forecasts from 2015 hitting £4.4 billion.

Of most critical importance: It is also a safer route to invest. While there have been business ventures funded by the crowd that have failed, there has never been a single incident of fraud in a wider industry that has been tarnished in recent years.

The U.S. is following suit. Recognizing the importance of this new sector, the U.S. Securities and Exchange Commission has two items of legislation that it should pass to permit the market to open up fully in the U.S. (allowing non-accredited investors to invest in private companies). If these laws pass, then the markets will open up to a huge wave of peer-to-peer (P2P) investment.

Like all great ideas, they tend to snowball. What will drive a wave of investment is the concept of the “wisdom of the crowd.” No institutions like risk. However, if they see the crowd ploughing into a product, then they will leverage this “wisdom” and plough in themselves since ideas will be seem to have been “validated” by the crowd. Who will be first? It is likely to be the VCs who today only invest 5 percent of their pool into startups.

Some interesting facts and predictions are arising: More than half of P2P business lenders plan to lend more in the coming year than last year. On the borrower side, 86 percent say they would be likely or very likely to approach alternative finance platforms first in the future even if a bank were to offer funding on similar terms.

It is expected that in 2015 a major financial institution will acquire or invest in a P2P lender. Banks and other financial institutions are slow to adapt, but they see the risks and potential of not being active in this market.

The EU will have to move to propose a common approach to crowdfunding. Continental Europe desperately needs growth within an environment that has a huge funding gap for small companies. Europe does not have the funding culture that the U.S. and UK benefit from, but it is the SMEs in these countries that create jobs and value that would benefit from access to these funds.

The funding platforms will evolve again. The expectation is that there will be a significant refocus — first to vertical platform specialization, where niche sites will target select markets like mobile apps, healthcare, publishing, science etc. Real estate is a sector that is already up and running. Do you have €10,000 and want to own part of a shopping mall in Colorado? Go to RealtyMogul.com. The second change will be the move away from “one-and-done” schemes. Standard crowdfunding involves a one-time fund to facilitate a project. It then closes. The market accepts that not all projects are designed to be self-sustaining when complete. So, they are evolving to providing ongoing support.

What are the implications of all this to you? The answer: Crowdfunding is here to stay and presents an ever growing means for “the individual” to invest. The choice is either to risk part of your savings in new ideas that can deliver significant returns or leave your money in a savings account that gives you a whopping 0.0001 percent interest return! Additionally, if you work in an industry that can be opened up by technology — real estate investment being a prime example — be aware or beware!

Based in London, Ed is the Head of Strategy for the Corporate Solutions team for Colliers International in EMEA. Ed has spent his entire career working with corporate occupiers, and today he specializes in delivering multi-discipline strategy and transactions to that sector.