What if I told you that debt crowdfunding, also known as debt crowdlending, will grow to be bigger than any of the other models? Let’s take the market pulse…
The Coolest Cooler campaign ($10.6 million and counting) on Kickstarter plus $55,000 for a Potato Salad! PonoMusic raised $6.8 million on Crowdfunder to date after a $6.2 million Kickstarter. American Gut raised $572,000 on FundRazr for Human Microbiome research. GoFundMe’s Bucks for Bauman campaign for Boston Marathon victims raised $808,955. Rewards, Equity, Research and Donation model campaigns, respectively, have all raised big money.
I have been an interested observer of the Crowdfunding space since I launched one of the first platforms, Fundfindr, back in 2008. Fundfindr was too early for the equity crowdfunding rush that is now unfolding due to changing securities regulations. Over the last two years I focused on the donations/rewards sector, as an executive with FundRazr, which provided a perspective across the model that has received the most attention via Kickstarter et al. With the recent launch of CrowdfundSuite, we now span the spectrum with partners in equity, rewards, donations and debt – the latter being Seattle-based startup InvestNextDoor.
Debt crowdfunding encompasses both peer to peer (P2P) lending and the newer peer to business (P2B) lending. The former as practiced by Funding Circle, Prosper, and Lending Club is mostly driven by personal credit consolidation. Why pay 20 per cent or more if you can pay institutional investors 10-12 per cent via a platform instead! The latter is now being offered by Lending Club and new entrants like InvestNextDoor. Lending Club connects institutional investors to business borrowers. InvestNextDoor has an innovative model where local investors directly bid on listings with a goal of impact investing and community building.
So, why the bullish take on debt crowdlending? Here are four reasons:
1. Global patterns play out
Masssolution’s 2013 report indicated that crowdlending was the biggest sector ahead of donations, rewards, and equity. This is driven by Europe where crowdlending is most established. If the pattern unfolds similarly elsewhere, then lending (and equity) will skyrocket as well. The markets have many similarities so we think the pattern will hold.
2. Better investor returns
Investor returns on the equity side could be massive as anyone who is familiar with the Oculus Rift story is aware. That is the exception, not the rule though as equity campaigns require a longer exit window (as shown by this Small Business Crowdfunding Infographic above, courtesy of InvestNextDoor), some will fail and these are investments that are dealing in private capital that is, short of emerging secondary markets, not liquid.
Contrast this with debt payouts of 10-15 per cent paid monthly that generate cash flow and a more secure return. This should attract investors looking to diversify and earn market returns. This has been the driver of the success of platforms like Lending Club, Prosper, Kabbage and On Deck that all have impressive growth rates including the impending IPO of Lending Club. Campaign sizes tend to be $100,000 or less.
3. Rewards and donations fatigue
While new levels are still being hit for pre-order campaigns like those mentioned earlier, some pundits point to a decline given the clutter of platforms that exist, the noise this creates on social media and the novelty decreasing after several backed campaigns. Donations face the fatigue of non-profit and personal calls for help as the strategy becomes pervasive, as there is only one wallet to feed the charity.
These campaigns also lack the investor profit motive that can attract institutional monies and sustained sectoral growth. We certainly haven’t seen the peak here, but the question was which sector will be bigger.
4. Hybridization
Masssolutions and others including myself, in my earlier ITBusiness.ca post on 2014 predictions for crowdfunding, have spoken to the trend toward model blending or hybrids. While platforms start with a single model focus there will be market demand for solutions that bridge them. This was a driver for starting CrowdfundSuite and numerous indicators back this trend.
The impact is that debt will be offered as an add-on or complement to campaigns in other categories. A recent example is a client that has a term sheet (equity) but wants to explore debt in parallel so as to reduce dilution while accessing a larger pool of growth capital. Fundable is a platform that has introduced a blend of rewards and equity. The PonoMusic campaign shows the Funding Escalator effect I coined in the Globe and Mail.
This Funding Escalator of different crowd solutions will best suit ventures at different stages and capital requirements. The good news is that they can draw on crowd-based solutions throughout and done right still attract traditional angel and/or venture and institutional funding. In fact, via crowdlending they build relationship with investors and institutional funding sources that they can draw on again in the future.
So, there you have it – global patterns, investor returns, backer/donor fatigue and hybrid models. Four reasons why debt crowdfunding, while under the radar, could be the big dog of crowdfunding in the future. The debt campaigns individually may not rival the million dollar campaigns in other sectors, but collectively, the market will be worth billions. Please share your thoughts.
What do you think? Agree or disagree? I’d love to hear from you, write in the comments below.