Crowdfunding is one of the most disruptive new alternative financial model, which is changing the way capital is raised and invested.
Technology, social media and the Internet are challenging traditional financial models as they give rise to a new type of financial services company. These new startups offer compelling new services, at a lower cost and with higher returns compared to the former ones.
Social media, big data analysis and mobile accessibility all provide the opportunity to raise funds in an easier and quicker way, reaching a wider audience and gaining greater exposure. This easier process leans itself to the times with people nowadays demanding convenience and instant gratification. This comes in the form of online payments services, cloud security and electronic identity verification which provide simplicity and speed in the alternative finance space. With the growth in internet access and smart phones globally, the opportunity for alternative finance to grow will continue. One area of alternative finance that is taking advantage of this landscape is crowdfunding.
Alternative finance in the Web 2.0
The creation of social websites such as Linkedin, My Space and Facebook has led to build the foundation of the social web or WEB 2.0, where it has become the norm for people to communicate, interact and share interests with friends through the internet. This landscape enables sharing, transparency and communication, giving more people access to financial services and providing customers with more transparent and quick services. Here are the factors that characterise the WEB 2.0 financial services world:
- SOCIAL PLATFORMS: they facilitate word of mouth and the creation of communities, decreasing customer acquisition costs. Through socials, companies can create a community specifically connected to their platform.
- Consumers are demanding more FLUENT AND EASY PAYMENT OPTIONS, and investment and lending processes as a result of more readily available information, the desire to share experiences and the proliferation of online and mobile-first user experiences.
- TECHNOLOGIES AND DATA: technologies and data are boosting innovation and are improving the services provided to customers, providing faster, more transparent and affordable services compared to traditional processes. A good example are neobanks, 100% digital banks which by cutting down infrastructure and other banking costs, are able to offer competitive rates and fees to their customers.
Crowdfunding and the WEB 3.0
That same social web has now built the foundation of crowdfunding for WEB 3.0, the evolution of the internet and social web applications that meet capital formation (Dresner, 2014). Jason Best and Sherwood Neiss, Crowdfund Capital Advisors, co-authored the crowdfunding investing framework used in the JOBS Act to legalise securities-based crowdfunding in the United States and defined the term crowdfunding in its various formats as:
The pooling of the financial resources of many individuals to convert an idea into a project or business. Instead of relying on a few large donors, it requires many small ones. (Dresner, 2014)
Crowdfunding has old origins - in 1876, the Statue of Liberty was financed through Crowdfunding. The citizens of France paid for the statue and the citizens of the United States paid for the pedestal. In essence, crowdfunding converts everyday people, rich or poor, into micro angel investors to power ideas and business growth. (Dresner, 2014).
As mentioned above, technologies and social media are impacting finance and are changing consumers financial behaviour, defining what nowadays is called the socialisation of finance. Financial services are moving online, they are becoming more and more automated, empowering customers, disrupting traditional banking systems and creating alternative markets. Different sub-sectors are benefiting from this evolution that is democratising the access to financial services, such as wealth management, lending, payments and ultimately, crowdfunding.
Crowdfunding, in all its forms such as debt, equity, rewards and donations, is one of the most disruptive new financial model. It’s changing the way capital is raised, new products are developed and capital is invested.
Crowdfunding has evolved from being a donation and charity fundraising platform, such as GoFundMe, to a reward platform like Kickstarter and Indiegogo and to an equity platform such as AngelList or Crowdfunder.
The following trends are shaping crowdfunding as an alternative funding model:
- Investors are attracted by crowdfunding projects as they feel involved in the creative process and they can see a transparent way to contribute or invest in companies aligned with their values.
- Moreover, crowdfunding is one of the most social categories of alternative financing, where campaigns can benefit from significant viral growth. Groups of people passionate about a project can share the campaign across their social networks and encourage friends to join the campaign.
- Crowdfunding platforms can rely on a strong network effect in proportion with the increase in the number of campaigns hosted. The first step of the network effect is the entrepreneur starting the campaign, then, once investors discover the offer, they start sharing it across social media. Social networks drive traffic towards the crowdfunding platform, helping the campaign to turn out successful and positively impacting future campaigns.