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Crowdfunding 2015: Growth, Platform Failures and IPOs

2014 was another explosive year for the crowdfunding industry but can crowdfunding 2015 repeat the pace or is platform failure coming?

crowdfunding 2015I ran this post originally in December 2014 to highlight some of the changes that were taking place for crowdfunding 2015 and the predictions being made. As we close up 2015, I thought it would be interesting to look at some of the predictions and see where the industry has grown this year.

I’ve talked with a few others in the industry to compile the thoughts below. I’m not as pessimistic in some topics though not as optimistic in others.

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Can the Crowdfunding Industry Continue to Double every Year?

Crowdfunding is on track to meet projections for $10 billion this year, nearly double last year’s $2.6 billion and a compound annual rate of 88% since 2011. I’ve seen a lot of forecasts for a market size of $20 billion in 2015 but I think the prediction is more a nice round number than any actual predictive reasoning. Richard Swart of the World Bank has forecast a global crowdfunding market of $300 billion by 2025. This would assume a compound rate of 36% annually over the next 11 years, which seems fairly conservative.

Probably the most interesting growth I am seeing now is the interest by real estate developers in crowdfunding their projects. Direct investment in real estate has long been relatively exclusive to institutions and accredited investors so the delay in Title III passage hasn’t affect the upside to the industry. With regulatory burden still limiting bank lending, a lot of developers I’ve talked to have turned to crowdfunding to fill the gap.

Small Business Loans Origination

Small Business Loans Origination

No doubt that we’ll see massive growth on any movement in passage of Title III of the JOBS Act as the market for equity investing grows ten-fold in the United States. Talks with contacts seem to point to a positive chance of some movement in rules but we’re not likely to see much until the later half of the year. My own (arbitrary) target for crowdfunding in 2015 is around $17 billion with about $2 billion of it in the equity space.

Update: We’ve been disappointed so far by the SEC’s lack of movement on Title III of the JOBS Act to allow non-accredited investors into equity crowdfunding. Regulation A+ was amended and enacted earlier in the year that opens a path for investors but crowdfunding platforms have yet to make changes. It seems the lack of enthusiasm by the government to really open up crowdfunding is scaring platforms, keeping them from opening to non-accredited investors for fear of regulatory problems.

I highlighted the changes to Regulation A+ in a previous article on equity crowdfunding investing. It’s a step in the right direction but we need the second step of platforms adopting the new rules to get any real direction.

Crowdfunding growth has already brought out an army of third party providers, so good and some not so much. I recently talked about avoiding crowdfunding promotion scams and questions to ask crowdfunding consultants.

A Crowdfunding 2015 IPO?

Following the insanely successful public offers by peer lenders Lending Club and OnDeck Capital in December, an obvious prediction would be for an IPO by one of the large crowdfunding platforms in 2015.

Angel and venture capital investors put more than $140 million into crowdfunding platforms this year and these groups are not the kind to sit around on an investment without an exit plan. According to VentureBeat, ten rewards platforms have received more than $275 million in investments with Kickstarter and Indiegogo the standouts in the space. Seven equity crowdfunding platforms have raised over $180 million with the oldest just four years old. I would expect one of the rewards-based platforms to announce an IPO while the equity platforms wait for growth after passage of Title III before any announcements.

The stock market has been volatile all year and has fallen on weaker economic growth. It’s not the best environment for a new issue of shares but I wouldn’t rule one out for a major platform. The problem is that growth is still fast enough to attract all the private equity capital the platforms need. There’s really no need to issue shares to the general public until growth slows and private equity wants to cash out.

A Big Crowdfunding Company Enters the Field

Dom Wolf at Investup.co predicts that a large, established company will enter the crowdfunding space to diversify its revenue. Dom throws out names like Ebay, PayPal and Amazon as potential digital giants that might benefit from connecting their established networks with the trend in crowdfunding.

The idea is an interesting one and I would add Chinese powerhouse Baidu to the list of possibilities. Ebay would be a natural fit with its auction platform experience and might be looking for revenue streams after spinning off high-growth PayPal. The move would definitely drive competition in the space and accelerate the M&A rush that some are predicting.

crowdfunding platforms

crowdfunding platforms

Crowdfunding Mergers but Fewer Failures than Predicted

Luke Lang, CMO of Crowdcube, forecasts market consolidation and widespread platform failure over the next 18 months as poorly planned platforms fail to reach the scale needed to survive. With growth in the overall space, I’m not sure how likely this will be. I agree that many platforms have been created with little long-term planning involved but market growth and potential seem likely to keep them on life-support for quite some time.

Instead of massive platform failures, I could see a wave of mergers and acquisitions as platforms combine to reach scale or get sold to more optimistic management. We saw the first of this with the merger of Crowdfund-italia.com and Kapipal to improve usability. I think widespread acquisitions of platforms by business incubators and venture capital firms would be an intuitive answer to any weakness in the industry. How many crowdfunding websites are there? Of the hundreds available, I reviewed the top 18 Crowdfunding and Fundraising Websites in another post.

As I’ve learned over my career as an equity market analyst, the bold predictions may be fine for TV but rarely play out in real life. As with most topics closely tied to regulation and legislative changes, the evolution of crowdfunding moved at an almost glacial pace in 2015. The optimism over an eventual passage of Title III and the passage of Regulation A+ to allow all investors into the space kept many platforms going that are probably not economically viable. It may take years for the crowdfunding industry to really consolidate where it should.

Crowdfunding 2015 has yet to offer any massive platform failures though the Federal Trade Commission (FTC) did go after its first failed crowdfunding campaign. The board game The Doom that Came to Atlantic City raised $122,874 but ultimately failed to deliver on its promises. The settlement amount of $111,793 was suspended due to the campaign owners’ inability to pay but is still payable at a later date. The FTC issued orders on several other campaigns but prosecution is difficult. These are very early stage companies and backers should expect that some will not be able to fulfill on promised rewards even if the campaign meets its funding goal.

We did see the start to consolidation in the industry. Patreon announced its acquisition of Subbable, a similar platform for video bloggers, in March. The smaller video platform was unable to bounce back after Amazon changed its payment processing terms and a sale to Patreon was the best for which it could hope.

It looks like crowdfunding 2015 is going to close out much the same way it opened with little change other than being much larger than where it started the year. The true test will come during the next change in the business cycle where less profitable platforms may be forced to merge. We’ll tackle predictions for crowdfunding 2016 over the next couple of months but it looks like the same predictions may just be pushed forward to coming years.

 

About Joseph Hogue

An investment analyst by profession, I run two blogs (Crowd101 and PeerFinance101) in personal finance, peer lending and crowdfunding. I've been on both sides of the table as a lender and a borrower and am excited to be a part of the peer movement. With the power of the internet, people are helping other people manage debt and raise money in ways never before possible.

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