According to industry estimates, there are currently over 500 active crowdfunding platforms – some sources have quoted 9,000 registered domain names related to crowdfunding. While these platforms vary along stated dimensions like form of security to investor—equity, debt, rewards, donation, industry and geography—there is another more important, often not stated, dimension that differentiates emerging platforms: quality. While the term “quality” can mean many different things, in the context of crowdfunding platforms it should come down to this: the more transparently that a platform brings together investors and entrepreneurs with the tools needed to make informed decisions which allow for mutual benefit, whether financial or psychological, the higher the quality of that crowdfunding site. The platforms that achieve this goal responsibly will share five characteristics:
1) Differentiation. In December I wrote a post titled, “Crowdfunding Predictions for 2013”. At that time, I predicted crowdfunding platforms would differentiate or die in 2013, specifically rewards-based platforms, where there’s Kickstarter, and then there’s everyone else. In December when I published the post, projects on Kickstarter had successfully raised $371 million. Fast forward to today, and that number stands at $574 million. That means projects on Kickstarter raised $371 million during the platform’s first 3.5 years in existence and over 50% of that amount in the last six months alone. Kickstarter’s lead is growing in rewards-based crowdfunding and other rewards-based platforms need to give users a reason not to use Kickstarter. If they fail to do this, Kickstarter will continue to attract the best opportunities and the capital that goes along with these projects.
2) Curation. Kickstarter was not the first rewards-based crowdfunding platform, and Lending Club was not the first peer-to-peer lending site. However, a key feature these platforms share—and a feature I believe all successful platforms will share—is curation. In short, these marketplaces help their investors make better decisions by curating the opportunities available. In the case of Lending Club, the platform offers potential investors one-on-one live assistance from Lending Club team members and a wealth of information on borrowers, from credit score, to debt-to-income ratio, to qualitative answers on how the borrower intends to use the proceeds from her loan. Not surprisingly, despite the fact Lending Club was not the first peer-to-peer lending site, it is the undisputed leader today, with almost $2 billion in loans funded. The platforms that survive must vet the opportunities they present to investors. Those that do not will wind up presenting investors opportunities that might have great tag lines and photos, but have no substance—and investors will be left holding the bag.
3) Funded by great investors. While crowdfunding platforms must have great investors among their members to survive (specifically equity crowdfunding platforms), I believe those platforms that will be left standing will also raise their own capital from great investors in the angel and VC communities. The Series A crunch has been well publicized and historic venture capital returns should tell you that out of every 10 crowdfunding bets that VCs make, only one will be successful, and success will disproportionately fall to platforms backed by VCs that have had past success. Why? Because the best platforms will have a myriad of VC options and will choose those investors who have stellar track records in building online marketplaces. Great VCs will serve as external validation for platforms destined for success, and they will accelerate the consolidation of the industry by separating the financial haves from the have nots.
4) Supply, supply, supply (of attractive deals/projects). I mentioned earlier that crowdfunding marketplaces—like all other marketplaces—will be held captive to network effects. Simply put, great investors want to use platforms with quality opportunities and quality companies want to be on platforms with great investors. Because companies and investors both derive additional utility from the presence of others on the platforms they use, there will be a pronounced network effect which will lead to consolidation. And how will investors/companies make their decision on which platform to call home? They will decide based on the supply of attractive deals/opportunities on that platform. Platforms will ultimately be judged by how successful the companies/projects funded on that platform are and how strong returns (however defined by the particular investor community) are to investors on the platform and thus the better the supply, the more successful the platform.
5) The Right Regulatory Approach. Since before launching an equity-crowdfunding platform, I have strongly supported a legal requirement that all equity-based crowdfunding portals register as broker-dealers. Registering as a broker-dealer means the business has undergone a rigorous examination process and met formal requirements for professional conduct. I believe that a broker-dealer designation will become increasingly more important for investors as they seek out the most reputable platforms, and those platforms that lack the certification will eventually die. Why would investors put their hard-earned cash to work on a platform with no regulatory oversight when platforms with such oversight exist?
It will be fascinating to see how consolidation plays out in the crowdfunding industry over the next few years. Regardless of who survives, I strongly believe those that do will have the characteristics I have described. These are the characteristics of a quality equity-crowdfunding platform, and it is quality that leads to strong returns. And, ultimately, of course, strong returns are what will determine the long term success of any crowdfunding platform.
Source: Forbes – Ryan Caldbeck