The rise in crowd-investing

By Adi Gaskell , CrowdFundBeat Guest Contributor Editor,

Crowdfunding has been expanding at quite a pace in recent years, but whilst I suspect most of you are familiar with the likes of Kickstarter, there is a slightly more serious form of the art growing in popularity.

Since President Obama passed the JOBS Act in 2012 there has been a steady growth in crowd-investment platforms.  Whereas Kickstarter et al might reward backers with a freebie or some other gift associated with the project, with crowd-investing platforms, the return is more akin to that associated with traditional investments.

I’ve written previously about investment platforms for real estate in both <a href=”http://adigaskell.org/2013/08/15/a-crowdfunded-foot-onto-the-property-ladder/“>residential</a> and <a href=”http://adigaskell.org/2013/12/31/crowdfunding-real-estate/“>commercial</a> properties.  There have even been platforms emerge that allow people to ‘invest’ in everything from <a href=”http://adigaskell.org/2013/07/10/the-piglt-approach-to-university-crowdfunding/“>university education</a> to <a href=”http://adigaskell.org/2014/12/15/using-the-crowd-to-fight-legal-battles/“>legal battles</a>.

All of these platforms share the ability for people to group together and invest in a project that they think will offer them a strong financial return.

The rise in crowd-investing

These sites are undoubtedly pretty cool, but they do nonetheless remain relatively fringe activities, certainly when compared to the wider investment world.  It is growing at quite a pace however, with the guys at <a href=”http://crowdexpert.com/investment-crowdfunding-platform-directory/“>CrowdExpert</a> highlighting a wide range of platforms offering people a communal approach to investing.

It’s believed that these platforms generated around $2.1 billion in investment in 2015, with considerable growth levels predicted for this year.

“We’re expecting 75-100% growth in US equity crowdfunding volume of capital raised in 2016, approximately $3.5 to $4 billion,” <a href=”http://crowdexpert.com/>CrowdExpert</a>’s David Pricco told me recently.

Indeed, Goldman Sachs predicted that crowdfunding was potentially the most disruptive of the new models of finance in a recent <a href=”http://www.planet-fintech.com/file/167061/“>publication</a>, whilst the World Bank predicted that crowdfunding investments will exceed $96 billion per year in developing countries alone within a decade.

Fairer investing

This growth is undoubtedly good to make access to funds more meritocratic.  A <a href=”http://faculty.haas.berkeley.edu/gorbatai/working%20papers%20and%20word/Crowdfunding-GenderGorbataiNelson.pdf“>study</a> published recently from UC Berkeley found that women perform particularly strongly in crowdfunding environments.

The authors suggest that this success is due in large part because women are better storytellers, and can therefore be exceptional at persuading us to back their projects.

“Online fundraising settings pose an interesting empirical puzzle: women are systematically more successful than men, an outcome contrary to offline gender inequality,” the authors explain. “We propose that this outcome is partially explained by linguistic differences between men and women in terms of language they use, and … results support our theory, suggesting a link between micro-level linguistic choices and macro level outcomes: the institution of crowdfunding may reduce gender inequalities in the fundraising arena by benefiting the communication style of women.”

 Retaining trust

If the market is to continue growing at such a pace, being able to maintain high trust levels will be crucial, both in terms of the reliability of the investor, and the quality of those they’re backing.

Brian Wang, one of the authors of <a href=”http://www.thefintechbook.com/“>The FinTech Book</a>, argues that the slightest hint of mistrust in the industry can severely harm growth levels, especially as the industry is still at an early stage and the legal framework surrounding it is at a nascent stage.

For instance, it’s quite probable that incidents in this early phase of the industry will trigger an excessive response that may invoke the kind of regulations that will strangle the industry.

This is a scenario that is playing out as we speak in China, where there are already something like 1,500 P2P platforms operating in something akin to a wild west.  Stories of misappropriation of funds is sadly all too common, and it will be interesting to see just how the industry responds there.

This matters because numerous <a href=”http://www.edelman.com/insights/intellectual-property/2016-edelman-trust-barometer/“>surveys</a> highlight the lack of trust society has in the finance industry in general, and the P2P sector can go some way to overcoming that.  With interest rates at such low levels, investors are also on the hunt for more fruitful places to put their money.  It’s an important time for the industry therefore and it will be fascinating to see the picture as it unfolds.

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