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Dissecting Crowdfunding

by Anthony J. Bradley  |  September 24, 2014  |  6 Comments

I have finished a detailed examination of 50 sites (list provided below). I also have read and examined the JOBS Act of 2012 myself to see the many, and valuable, interpretations of it firsthand.

This examination has led me to the basic conclusion that most of these “crowdfunding sites” are not actually crowdfunding. And that is ok. There still can be significant “funding” value in them. But there are some fundamental and significantly different aspects to these sites that both investors and entrepreneurs must understand to be successful when using them. Just as a sedan, a sports car and a truck are all transportation vehicles but each has a specialized purpose these sites are good for some funding and investment goals and inappropriate for others. Here is my dissection in summary.

  • iFunding
  • Crowdfunding
    • Crowdfunding platform
    • Crowdfunding marketplace
      • Charity crowdfunding
      • Reward crowdfunding
      • Debt crowdfunding
      • Equity crowdfunding

iFunding.

Yes, I am introducing a new term. iFunding is internet assisted traditional funding. In other words, the funding model has existed for years if not ages but now it is easier or extended. A good example of this is private placement. Investopedia defines private placement as, “The sale of securities to a relatively small number of select investors as a way of raising capital.” I think we can agree that this definition is not crowdfunding.

However, Title II of the JOBS Act of 2012 opens private placement investments up for public solicitation to accredited investors (a bigger selection investors) and Title IV raises the number of accredited investors to 2000. These changes have led to iFunding for private placement. Examples are AngelList, Circleup, Crowdfunder, Early Shares, EquityNet.com, Funders Club and Wefunder. I’ll dedicate a whole post to this category next time.

Another iFunding scenario is raising money from friends and family for personal reasons or causes. We have been raising money from friends and family for a long time now. The internet may have made it easier (if you are willing to shell out 5-8% cost of funds raised) but it certainly is not new or groundbreaking. Examples are Fundable, GoFundMe, Kapipal and Tilt.com

Crowdfunding.

Crowdfunding involves large numbers of people collectively raising large sums of money through small individual contributions to support a particular opportunity. This is a common and general definition. But taking it to more specificity in the spirit of crowdfunding’s innovation and potential the definition is more accurately stated as; a thousand or more people from the general populace (with no pre-existing relationship) rally to collectively raise tens of thousands of dollars or more (using the internet) through individual contributions less than a thousand dollars but realistically less than a hundred dollars.

I fully realize that there are many who would disagree and prefer a much more general and widely encompassing definition. But if we want to herald crowdfunding as “The Next Big Thing” with the potential to disrupt the financial industry then we must admit that using a web site where my friends can pool birthday gift money to collectively buy me a new set of golf clubs really doesn’t cut it. Convenient, yes. Disruptive to capitalism’s financial system, no. iFunding, yes. Crowdfunding, no.

Crowdfunding sites can come in two forms; platforms and marketplaces.

Crowdfunding Platforms

Crowdfunding platforms are sites where people can build their own crowdfunding site or construct their own experience but then are expected to draw their own crowd often via email or social media. This does not seem to be a thriving sector of crowdfunding. Examples are clickstartme.com, CreateAFund, fundly.com and invested.in.

Crowdfunding Marketplaces

Marketplaces are much more prevalent. A marketplace has a crowd of funders and a good set of funding opportunities and brings them together via a mostly common experience. If you want to raise funds you need to build a profile but not your own site experience. You join other people with funding opportunities and you benefit from an existing crowd vs. needing to draw your own.

And there are four types of marketplaces (though some will try to blend more than one type in a single marketplace); charity, reward, debt and equity.

  • Charity Crowdfunding: With charity crowdfunding sites you donate money to cause with no expectation to receive anything back except the warm feeling of giving. Examples are Crowdrise, Experiment, justgiving.com, Razoo and youcaring.com.
  • Reward Crowdfunding: With reward crowdfunding you expect to receive some good, service or trinket from your contribution. Examples are Bloom, CrowdBnk, fundageek.com, indiegogo.com, KickStarter.com and RocketHub.
  • Debt Crowdfunding: with debt crowdfunding you expect to receive interest payments on your investment. Examples are Lending Club and Prosper.
  • Equity Crowdfunding: with equity crowdfunding investments you expect to own a stake in the enterprise.

One lone site, Bolstr, has a revenue sharing investment model. I’ll position them as the exception to the rule.

So there you have it, my take on the breakdown of the space (at least as represented by the 50 sites I examined).

Here are the stats.

  • 52% of the 50 are iFunding and 48% are crowdfunding.
  • 29% of the crowdfunding sites are platforms and 71% are marketplaces
    • 26% of the crowdfunding marketplaces are charity
    • 47% of the crowdfunding marketplaces are reward
    • 21% of the crowdfunding marketplaces are debt
    • 0% of the crowdfunding marketplaces are equity
  • 14% of the 50 are defunct

In future posts I’ll dive into the specifics of this framework and explore the current state and future potential of each. I’ll give you what I think works and what needs to change for crowdfunding to really disrupt and transform.Comments welcome.

As promised, here are the 50 sites. If I missed any really cool ones let me know. I will continue to add to the list.

AngelList, banktothefuture.com, Bloom, Bolstr, Circleup, clickstartme.com, CreateAFund, Crowdbank, CrowdBnk, crowdequity.com, Crowdfunder, crowdfundingbank.com, Crowdrise, dreambank.org, Early Shares, EquityNet.com, Experiment, Fundable, fundageek.com, Funders Club, fundingcircle.com, fundly.com, fundrise.com, giveforward.com, GoFundMe.com. indiegogo.com, invested.in, jumpstartcity.com, JumpStartFund, justgiving.com, Kapipal. KickStarter.com, Laraghfinance.com, Lending Club, MicroVentures.com, Petridish, Prosper, Razoo, realtymogul.com, Rock the post, RocketHub, Seedinvest, somolend.com, techmoola.com, Tilt.com, uinvest.com.ua, venturehealth.com, Vunded, Wefunder, and youcaring.com.

Category: crowdfunding  

Tags: crowdfunding  

Anthony J. Bradley
GVP
10 years at Gartner
26 years in IT

Anthony J. Bradley is a group vice president in Gartner Research responsible for the research content that Gartner publishes through its three internet businesses (softwareadvice.com, capterra.com and getapp.com). These responsibilities include creating and leading the research organization and infrastructure needed for the strategy formulation, planning, research, creation, editing, production and distribution of the content. He has four global teams of highly talented people who are advancing towards the world's greatest destination for content on how small businesses succeed through information technology.


Thoughts on Dissecting Crowdfunding


  1. John Ue says:

    I do agree with your perspectives very much. Some of them are using the concept to raise funds to build the site and difunct. Well, they must fall into trial & error category and must give us sign ‘Oops, this is not a good idea’.

    I am having a very hard thought about the model to respond to my client’s questions for a last few weeks. I do question, ‘why does it has to be fees and commission gets in the way?’ Technologies enables us to uncover needs of the crowd on both sides. Conventional and even more complex business models strive their efforts in such competitve environment to win high expectations from customers. In reference to my retail background where margins are way below two digits, 13~20% for what? Utilizing (Now) readily available tech and concepts is that much of value, not to mention processing costs, such as credit card fees, are on to the funders, i.e THE CROWD.

    I may be sound too much naive…. Aslo in reference to my short experience in Financial sector, the players in the banking and finance industries uses word LCF. They are making tones of money with people (the crowd) put their savings, not huge dollars, you know what I am getting at. Why they regulate them?

    Personally, I backed three projets in Kickstarter….Two successful and one fail with less than 10% of the target. The others I have waited 5-6 months to get something tangible… Two side of crowd meet good causes …. just website and faciliting messagings with social plug-ins..

    My starting point is setting the fees for the both side of crowd “0.0%”, not talking about charity model. I figured that this will give me ideas to build something to serve the purpose of CROWD.

    PS: Where I get this idea of “0.0% fee”? From your previous post…. The picture of the crowd…

    Why am I having hard thoguts on this

  2. Leo says:

    You missed fundedbyme.com and crowdcube.com, two larger ones in Europe. Unless you only want to look at the US market :-)

  3. Anthony J. Bradley says:

    Thanks Leo. I’ll add them to my short list. I have tried to look globally especially for charity and reward based crowdfunding. About 20% of the 50 I looked at are non-US based. Also, about 24% target a global adience regardless of where they are based.

  4. Anthony J. Bradley says:

    Thanks John. I have found (and will post on this shortly) that a majority of the sites I looked at actually don’t target the crowd. And so their approaches, experiences and business models are not tailored to mass participation. You are absolutely correct that, in many cases, the fees alone will keep the crowds away. I believe that, in the long run, he who owns the crowd will win. So I think most of them will fail to grow to a critical mass. Like I said earlier, more on this later :-).

  5. […] They are exclusive. All of the sites I examined are currently limited to Accredited Investors. This is to be expected since it is the law (in the US at least). However, they are not positioned well to adapt to Title III of the JOBS Act (crowdfunding) when the SEC does deliver approved rules. It does not seem that they intend to adapt. They are exclusive even with accredited investors. In many cases you have to apply to invest. In most cases, the investee chooses the investor (which is the opposite of crowdfunding). This exclusivity also applies to investment opportunities. According to some of the sites’ FAQs, most internet-based intermediaries (or portals as the JOBS Act calls them) heavily vet the opportunities. Some FAQs say they accept less than 5% of opportunities. So the crowd doesn’t vet the opportunities. The intermediary does. This traditional funding “gate”hardly brings forward new startup opportunities. As a consequence there are usually less than a handful of open opportunities on any one portal. Not exactly a thriving crowdfunding marketplace. In addition, many of the sites explain their investor selectivity saying that the investees don’t want a large number of investors because it can hurt their downstream chances for traditional venture capital funding. So they want to choose the fewest number of accredited investors that will give them the most funding. This is a red flag. They really are not interested in crowdfunding. This is traditional angel or private placement investing extended to the internet. I call this Angel iFunding. […]

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