Unlocking the global trillion-dollar crowdfunding market

Written by Kevin Lawton

Now here is the one percent you do want to hear about!  

The world is on the precipice of creating a trillion-dollar crowdfunding market. In Australia, the ASSOB has offered a crowdfunding investment portal since 2005. In the UK, equity crowdfunding is already in progress, with investment platforms such as Crowdcube andSeedups. And in the Netherlands, crowdfunding is ramping up with Symbid.  The crowdfunding components of the American JOBS Act and the Italian Decreto Crescita are now in the process of finalizing the attendant regulation before securities crowdfunding goes live.  Industry associations are popping up everywhere, including in India, Europe, Canada, and the U.S. (CFIRA, CfPA).  If you want to get an idea where things are headed, look at the travel list of the leading crowdfunding advisory team, Crowfund Capital Advisors. Recently, they’ve visited Colombia, Canada, Mexico, Italy, Turkey, Sweden, and Dubai, with upcoming visits to Singapore, Malaysia, Hong Kong, and Sydney. They’ve also secured a relationship with the World Bank to study crowdfunding as a way to unlock innovation in developing countries.

Think about the implications of shifting just one percent of long-term investments to small business via crowdfunding. In American alone, that would create a $300 billion market for crowdfunding (10 times the venture capital invested in all of 2011).  Indicating where things are headed, for accredited investors there is IRAvest, the Internet’s first equity-based crowdfunding portal specifically created for self-directed IRAs.  

Now imagine the general public investing in crowdfunded small businesses through fund vehicles (as I blogged about in the 2010 three-part series, “The New Face of Venture Capital”) or individual investments. That’s a huge transformation in the small business financing landscape.  At the one-percent mark, globally this translates to more than a trillion dollar market. And how big is one percent? The average volatility of the S&P 500 was 0.62 percent from its inception in 1957 through 2010. We now have a material amount of real data in crowdfunding.  

As it turns out, the fear, uncertainty, and doubt was hot air. The transparency and social networking dynamics of crowdfunding have been excellent at keeping fraud near zero, to the point where heavy regulation will work against this new economic machine.  It’s not just the crowdfunding platform founders and bloggers taking this position. Legendary venture capitalisst Tim Draper (who created MeVC, an early crowdfunding-style investment vehicle that he says was regulated out of existence) said recently at Techonomy Detroit, “I think we should just sunset all the laws and just move forward.” We’ve seen a number of other members of the venture community getting behind the crowdfunding trend, such as Fred Wilson of Union Square Ventures speaking at Grind in NY and Manu Kumar of K9 Ventures, who said to the Venture Capital Journal Feb. 2012, “Having companies that have been proven out using crowdfunding will only create better pickings for the venture capital industry to come in and scale those startups.” To get to this point in crowdfunding history has taken some heroic efforts on the part of so many people. But as this space expands, we need even more leaders, from every continent to rise up and voice your support.

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Funding Circle get £20m boost from Government for SME lending

The UK Government has announced plans to lend to small businesses through Funding Circle. Earlier in the year, the Chancellor George Osborne revealed that £100 million would be allocated to non-bank groups to help ease the problems of low SME lending.

It has been revealed that Funding Circle will be one such vehicle and the Government will be working with them to lend £20m. Funding Circle crowdsources loans for small businesses. While bank lending has dropped, Funding Circle has grown rapidly. In two years since launch, thousands of British people have helped to lend £65 million to more than 1,300 businesses. In Novemeber 2012 alone, investors lent £7m to British businesses.

Everyone will be well aware of the problems that small businesses have had in recent years when it come to getting loans from traditional sources such as the banks. So this looks like a clever and innovative way to approach that problem. It is hoped that the scheme will come into action early in 2013.

Funding Circle makes minimum loans of £5k with a maximum loan of £500k. Investors can lend out from as little as £20 and the gross yield is 9.1%. To find out more about Funding Circle’s loan terms, visit their site.

How will it work?

The Government plans to lend £20 million to British businesses through Funding Circle over the next 12- 24 months. This is subject to parliamentary approval and agreement of legal terms and conditions.

The current proposal is that the Government will lend on every loan that comes on to the marketplace and fund up to 20% of each loan at the average rate. The remaining 80% of a loan will be funded by investors in the normal way, so your investment experience will remain exactly the same. Once the auction has closed and the average interest rate has been set for the remaining 80%, the Government will fund 20% at the same interest rate as the rest of the loan.

You can find out more on the Funding Circle site.

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