What if Crowdfunding Becomes the Leading Source of Finance for Entrepreneurs or Growing Companies?
Wednesday, May 20, 2015
Can crowdfunding offer a viable source of funding to growth orientated businesses around the world? 2015 promises to be a big year for crowdfunding in terms of the role it may play in getting entrepreneurial ventures off the ground. What might that world look like if it became the leading source of finance for companies starting out? To that end, one has to better understand the phenomenon and its rapid expansion to date.
Why now? In 2014, the total global capital raised through crowdfunding platforms stood at $16.2 billion, according to a study by crowdfunding research firm Massolution, which was cited by the Economist. The number of crowdfunding platforms has experienced dramatic growth over the past decade. In Europe alone, I’ve observed the number of platforms growing from less than a dozen in 2009 to more than 10 times that in four years. Policymakers, to a large extent, have catapulted crowdfunding into global awareness.
The Jumpstart Our Business Startups ACT in the U.S., and similar legislation across the world, opened the “regulatory door” to this innovative funding approach. Before the act was passed in spring 2012, crowdfunding sites could reward investors with just products or discounts. But the act has given them the freedom to offer backers a stake in the business.
By analogy, the origin of the venture capital industry is often credited to another regulatory change, the Prudent Man Rule of 1979, which allowed U.S. pension funds to allocate a fraction of their assets under management towards risky investments. A supportive regulatory environment will be instrumental to the continued growth of crowdfunding as a credible and persistent alternative. It follows that crowdfunding will proliferate in those countries where regulators can balance the potential – and challenges – associated with the funding source.