NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, August 25, 2015

Crowdfunding has been celebrated as the grand democratization of finance — a mechanism for anyone with a business idea to raise money from their peers, outside the bureaucracy and nepotism of more traditional fundraising paths. But while this “of the people, for the people, by the people” approach to raising money may see itself as divorced from anything happening on Wall Street, that’s hardly the case.

On Monday, the Dow Jones Industrial Average ended the day down 588 points after opening with a terrifying 1,000-point plunge. In the last five days, the major U.S. indexes have lost more than 9 percent of their value as global-growth concerns roil the markets. That’s the kind of volatility that should worry investors of all stripes.

It’s also just the beginning, according to Anindya Ghose, professor of IT and marketing at NYU’s Stern School of Business. Ghose says recent stock market volatility is indicative of a bear market that is likely to last about three years. “I am pretty confident this is the beginning of a much needed correction,” he says. The Dow had been steadily climbing since February of 2009.

For entrepreneurs looking to raise money on sites like Kickstarter or Indiegogo, the volatility could result in fewer or smaller donations. After all, watching the Dow dive off a cliff doesn’t do much for consumer nerves. And investing in the next creative, neat gadget on Kickstarter falls into the category of discretionary spending that is first to go when a person is feeling anxious about his financial life.