The crowdfunding phenomenon – looking beyond the hype

by Marco Testoni and Karen E. Wilson on 14th May 2014

The concept of “crowdfunding” has increasingly drawn attention, most recently for its possible role in providing equity funding to start-ups. While there is a growing hype about crowdfunding, there are also many misperceptions. Crowdfunding initially started for philanthropic projects (in the form of donations) and then spread to consumer products (in the form of pre-funding orders) and lending. However, equity crowdfunding, sometimes called “crowdinvesting” is relatively new and currently comprises the smallest part of the crowdfunding market. Crowdfunding can be defined as the collection of funds – usually made by means of a web platform – from a large pool of backers to fund an initiative. Two fundamental elements underpin the crowdfunding model and are both enabled by the development of the internet: By substantially decreasing the transaction costs, the web makes it possible to collect small sums from a large pool of funders, the “crowd”. The aggregation of many small contributions can result in considerable amounts of capital. The internet makes it possible to directly connect funders with those seeking funding, without the need of an active intermediary.

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Crowdfunding platforms assume the role of facilitators of the match however they differ in terms of the activities they perform. Some of them simply provide a portal and automatically post every project, while others screen and make a pre-selection of projects based on a set of criteria. This relatively new financing model is experiencing exponential growth globally. In the period 2009-2013, the compound annual growth rate (CAGR) of the funding volumes was about 76% with an estimated total funding volume of $5.1bn in 2013. In terms of geography, the biggest market has been North America (and mostly the U.S. where the concept of crowdfunding started) with 60% of the market volume, followed by Europe, which has 36%. A) Worldwide funding volumes ($M) | Read more at Bruegel http://www.bruegel.org/nc/blog/detail/article/1330-the-crowdfunding-phenomenon

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