The Next Silicon Valley

Crowdfunding is the new seed funding for innovation

Crowdfunding is not necessarily new (remember the story behind the Statue of Liberty), but what it is doing in the modern age is funding an unprecedented global wave of innovation. Two reports just out highlight the growth of various methods of crowdfunding, including rewards based and equity based.

Seed funding has always proved difficult for both equity and, increasingly as we’ve moved to a knowledge economy, debt, leaving a gap at the start of the entrepreneurial funding ladder.  The crowdfunding market is addressed with a number of business models, including:

One report ‘2016: State of the Crowdfunding Nation’ from , finds that rewards-based crowdfunding in particular is ‘the new seed funding’ and that it is at least as significant as the larger numbers claimed for equity crowdfunding – set to surpass VC funding in 2016 (which itself is estimated to provide about $30Bn annually).  The report points out that seed-funding rewards is 10x more valuable to entrepreneurship and the economy than the equivalent amount in angel and VC funding because the funding ask of angels and VCs is two or three orders of magnitude (ie 10 to 100 times) more than at seed stage. This is “not unlike addressing the ‘first time buyer’ problem in the housing market” it says.

“Rewards crowdfunding is now the new seed-funding,” commented Barry E James, founder of TheCrowdfundingCentre. He says it is transforming innovation by transforming the prospects of entrepreneurs across the world that have been excluded until now – thus creating an unprecedented ongoing wave of innovation that shows no sign of letting up: quite the reverse. Over the last year it’s settled into a steady rate of growth of around 25 percent.

From a high base, created by rapid growth in 2014, rewards crowdfunding grew over the last year in excess of 25-27 percent as measured by amount raised – with participation (the numbers of pledges) increasing significantly (12 percent) while the success rate fell by 2 percent as publicity attracted those less prepared for the process.

The number of projects launched on major platforms increased slightly (2 percent) while the numbers of projects (fixed model) exceeding target fell by 9 percent. Four percent fewer ‘flex’ campaigns raised money. Overall contributions increased by 40 percent and average pledges by 11 percent with the average number of backers per project also up 12 percent.

Total funding is estimated at over $1 billion with more than $820 million from just the two top platforms, Kickstarter ($590m) and Indiegogo ($233M). The worldwide total is estimated to be in excess of $1.6Billion – and could be as high as double that given the known high levels of additional activity in China and other non-English speaking territories.

“What this new data is telling us is that rewards crowdfunding’s growth is sustained and at a high enough level to be making a significant impact on the mainstream economy, especially entrepreneurship and innovation. Seed-funding has always been an important but difficult, and so under-served, market. Feeding as it does ‘upstream’ investment. The structural difficulties, exacerbated by the financial and banking crisis, have become worse but it looks very much as if rewards crowdfunding is now providing a real alternative,” commented Dr Richard Swart of UC Berkeley

Sherwood Neiss, partner, Crowdfund Capital Advisors & one of the architects of the USA’s JOBS act, added “Countries seriously interested in promoting entrepreneurship, innovation and jobs need to be looking at this data to see where they can develop core competencies and complement them with crowdfunding. This represents serious capital injected into an economy that will have a lasting impact.”

The ‘most backed’ campaign was the ‘Exploding Kittens’ game which raised $8.8 million, representing 87,826 percent of its target from more than 219,000 backers. The most funded was ‘Pebble Time’ with $20 million and 4,000 percent of target – a second run out for the Pebble team. This does not include the Star Citizen game which alone has raised $100Million, mostly via its own website, so not on a major platform and therefore not covered in these estimates.

“It’s difficult to think of a sector of the economy that remains unaffected,” commented Barry E James of TheCrowdfundingCentre. “Its early days in some but even some litigation and legal services are now being funded from the crowd.”

Trends in the broader crowdfunding market

Another report from analyst firm Technavio on the global crowdfunding market analyzes the most important trends expected to impact the market through 2020. This market research report includes a detailed segmentation of the global crowdfunding market by business model (P2P lending, equity investment, hybrid-based, royalty-based, donation, reward-based, and others) and by end-user businesses (entrepreneurship, social cause, movies & theater, real estate, music, technology, publishing, and other).

It also outlines the market shares for key regions such as the Americas, APAC, and EMEA. The key vendors analyzed in this report are Gofundme, Indiegogo, Kickstarter, Patreon, and Teespring. The firm predicts the global crowdfunding market to grow at a CAGR of nearly 27 percent by 2020.

Four key trends it identified are as follows:

Dominance of crowdfunding platforms – the report states that more than 300 crowdfunding platforms were present in 2013. This figure increased to 1,300 by the end of 2014 and is forecast to rise significantly during the forecast period. Despite the rapid rise in the total number of websites, market-specific websites such as AppStori for app development, MedStartr for healthcare, and Barnraiser for food and agriculture, are not able to compete with major players such as Kickstarter and Indiegogo. Kickstarter has more than 4,000 active campaigns, while AppStori had three, MedStartr had eight, and Barnraiser had 20 as of October 2015.

“Non-specific websites such as Indiegogo have the largest global reach, with better abilities to amplify a product or concept in comparison to smaller market-specific platforms. Also, with the increasing number of M&A, smaller platforms will be better equipped to compete in the market,” says Technavio’s new research areas lead Soumya Mutsuddi.

Growing popularity of equity investment – equity investments allow investors to have an equity share in the company. Many websites such as AngelList, CircleUp, Crowdfunder, and Fundable facilitate such transactions by connecting investors with entrepreneurs to fund the company in exchange for shares in their startups. Equity investment accounted for over 7 percent of the overall crowdfunding market in 2015 and is expected to exceed 15 percent by 2020.

Hiring professional campaign managers for crowdfunding – Technavio highlights the fast-trending factor where many startups are hiring professional campaign managers to run their crowdfunding campaigns. This trend is observed across all crowdfunding platforms with positive results. As a result, the average funding for a successful campaign in 2015 increased five times more from 2010.

“Marketing a campaign is essential not only for the success of a project but also to attract suitable investors,” adds Mutsuddi.

Venture capitalists using crowdfunding – startups that seek venture capital investments on a regular basis launch crowdfunding campaigns. The main objective of these campaigns is to test their products and receive customer feedback before engaging investors. Many venture capitalists want startups to engage in crowdfunding before requesting for funds. Between 2010 and 2013, hardware startup enterprises that raised more than USD 100,000 on Kickstarter or Indiegogo have secured over USD 350 million from venture capitalists.

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