In the last few weeks, questions have been asked about the longevity of crowd finance. This has largely been prompted by events on the other side of the pond, where Lending Club and others have been making headlines, and Title III of the Jobs Act has not resulted in explosive adoption.
Crowdsurfer has been in the thick of the developing and evolving crowd finance movement for a few years, building the global data intelligence service for the industry. Over this period, my experiences and unique exposure to the industry in all its forms have convinced me more than ever that online marketplaces are unequivocally here to stay.
Here are my top 6 reasons why:
1. Basic supply and demand: there is unmet need for finance
It clear that financing is taking too long or not forthcoming at all from traditional sources, and not just for SMEs. Large companies, professional fund managers, individuals, charities, community projects and educational institutions are all struggling to access the funds they need. The flow of finance has got stuck, and the fallout from the financial crisis, continued market volatility and geo-political events mean this is unlikely to change without disruptors.
2. Money has to go somewhere: there is unmet need for investment opportunities
There is plenty of capital available in the world ready and wanting to be put to use, but unable to do so because the usual opportunities have become less appealing.
For many investors, continued low interest rates (particularly in the UK) and volatile markets are limiting access to healthy returns. The millennial generation (those currently in their 20’s and 30’s) are struggling to find diversity, a defining aim as an investor group. Add to this corporates sitting on record amounts of cash (American companies alone are sitting on $1.9tn) and aid budgets not reaching their target recipients, and the need for a disruptive force to enable access to funding is clear.
3. Current financial markets are incredibly inefficient
Those seeking finance often struggle to connect with the right people, due to reliance on one’s own network and their location. Also, the manual nature of the traditional financing process results in higher costs for raisers and lower returns for investors.
Legacy and complex technology infrastructure is also contributing to this inefficiency. This is making it difficult for existing financial service providers to react to market demand, particularly for millennials, who expect instant online service, easy access and lots of choice. An interesting development we are also seeing are traditional finance businesses (corporate financiers, fund managers, etc.) looking to adopt online marketplace technology themselves to make their own processes more efficient and lower their own costs of fundraising.
4. Crowd finance is viral
The internet removes geographical and relationship based barriers, connecting many to many rather than a few to a few. Online platforms are built with these inherent strengths, letting them take advantage of communication virality and easy access. This is in contrast to businesses defined by their branch networks.
Crowd finance is also enabled by being web technology led, and not needing (relatively) huge amounts of upfront funding (which has traditionally prevented new financial service providers entering the market). The emergence of vendor technology providers dedicated to crowd finance are reducing the set-up costs and accelerating service launches.
5. The industry has already successfully passed its proof of concept phase
Plenty enough business has passed through online funding marketplaces in the past few years to demonstrate that online funding works. We’ve already mapped $29bn in detail, and there’s much more out there too. For instance Funding Circle was the third largest SME lender in the UK last year behind the RBS and Lloyds Bank.
We are now entering a new phase of the industry’s development, which sees new levels of diversification, niche exploration, and new marketplaces joining the movement daily.
6. An ecosystem of service providers are speeding up the industry’s maturity
A signal of a maturing industry is the arrival of ‘ecosystem’ businesses springing up to support it – and we count ourselves in that. There are now a variety of service providers supporting the crowd finance industry, including:
Whilst we are confident in the principles and scalability of the industry, that’s not to say we don’t expect more bumps along the way that come with explosive growth (look at the fight fellow disruptors Uber and Airbnb are having in their fields). In any new industry there will be critics, and those critics play a valuable role in steering and strengthening the newcomers. We look forward to the next 18 months and the next phase in industry’s journey towards mass adoption.
Originally published on the 15th of July 2016