I Don’t Crowdfund, I Invest
This article originally appeared in Ryan’s Forbes Blog.
I don’t crowdfund. I invest in consumer products companies. For true investors and those who focus on maximizing returns and managing risk — this is an important distinction that I think many people overlook in enthusiasm for crowdfunding. Not all platforms are created equal. From my years as a private equity investor and as the founder and CEO of an accredited investor crowdfunding platform, I think recognizing the difference between investing and crowdfunding is crucial.
At last count, according to crowdsourcing.org, there were around 400 crowdfunding platforms around the world – but you likely cannot list more than five. Just because crowdfunding takes place on these sites does not mean that investing is happening on most of those platforms. Crowdfunding platforms supported more than a million campaigns in 2012 that raised $2.7 billion, an 81% increase from the prior year, according to research and consulting firm Massolution. That’s a lot of money. The trouble is crowdfunding is a broad term covering (1) donations and sponsorship where the contributor expects no financial return, (2) lending and (3) investment in exchange for equity, profit, or revenue sharing. So to say you are a crowdfunding site is not very telling.
Now that we are several years into the crowdfunding wave, we are seeing, first and foremost, the proliferation of platforms. But, more importantly, we are witnessing the growth and success of those platforms that have a clear focus.
Crowdfunding is a vast category, but I believe the sites that win will be those that are focused on what Union Square Ventures partner Andy Weissman calls “point solutions.” These are the platforms that are not all-encompassing marketplaces that crowdfund anything, but rather those that are highly targeted.
Kickstarter is one examples of a focused, successful platform. Kickstarter enables you to back an early-stage project you love: Projects like the Veronica Mars movie or the $299 3-D printer for consumers that hit its Kickstarter goal of $50,000 in 11 minutes and in three days had raised more than $1.5 million. During the first quarter of 2014, Kickstarter averaged $1.2 million in pledges daily, and almost 4,500 projects reached their funding goals. By making it easy for passionate, smart creators to connect with people who are equally passionate about supporting cool projects, Kickstarter has become a dominant community with more than $1 billion pledged since it launched in 2009.
I find it interesting that the first two non-profits embraced by Y Combinator were crowdfunding platforms, and both are very focused: Wadsi, funding medical treatments in developing countries, and Zidisha, a person-to-person micro-loan network for enterprises in developing countries to attract funding from investors.
When it comes to crowdfunded investing — whether you want to lend funds or make private equity investments — point solutions appear to be the clear winners.
Crowdfunded investing could be a $2.2 billion to $5.5 billion market, according to estimates from UC Berkeley’s Fung Institute for Engineering Leadership. That’s assuming that it is just 1 to 2.5% of the current combined value of angel investments, small business lending, and entrepreneurial and small business venture funding.
The success of Lending Club is a great example of how investors benefit from a point solution. By focusing on linking consumers who need loans to investors who desire attractive returns, Lending Club has, in just seven years, facilitated more than $3.8 billion in consumer loans. Having proven itself with consumer lending, Lending Club is now adding small business lending. This is how the successful crowdfunding platforms will evolve: by addressing a specific problem or gap in the marketplace, providing a solution that benefits investors and entrepreneurs, and then extending their product line as they gain scale.
Just as in crowdfunded lending, accredited investor crowdfunding is taking off as more investors understand the powerful network effects of an online platform. The most successful accredited investor platforms will have a focus, such as enabling investors to create a diversified portfolio in consumer products companies.
I think Union Square Ventures’ partner Fred Wilson was spot on when he estimated Americans will ultimately invest 1% of their investable assets through crowdfunding, which will make this a $300 billion market. The potential for attractive returns may be available for those investors who do research and utilize the expertise provided by point solution platforms. That said, realize that these investments are risky, illiquid, long-term investments.