Shhh. I’m going to let you in on a little secret. Next week, Funding Launchpad is going to announce our intention to become an investment crowdfunding platform. You might say that we’re dreamers, but we’re not the only one.
This is our second analysis of Crowdsourcing.org’s Crowdfunding Industry Report, looking at the explosion in crowdfunding platforms.
Before we analyze the platforms, let’s examine industry revenue. Per the study, crowdfunding was a $530 million global industry in 2009. That figure was nearly $1.5 billion in 2011 and is projected to be $2.8 billion in 2012. Thanks to a 74% compounded annual growth rate (CAGR), industry revenue grew 420% through the great recession. Wow!
Unfortunately for most competitors, massive industry growth was consumed by a slew of new entrants. Back in 2009 there were 148 crowdfunding platforms. As of April 2012 there were 452 – with an estimated 536 by year end. If that estimate holds up the number of competitors will have grown 260% in five years. During the crowdfunding boom, where industry revenue grew by 420%, revenue per platform increased by only 45%. Taken a step further, if you assume each platform only keeps 5% of total revenue (like Kickstarter), the average platform really earns just $261,754 per year, before expenses.
It is true, most companies can only dream of having achieved a 13% CAGR over the last three years. And it seems inevitable the JOBS Act will open a major additional avenue for growth. But if the number of crowdfunding platforms continues to grow unabated, this will not be a lucrative industry for most operators. In turn, market noise and desperation to stay afloat will not help startup and small business owners looking to raise funds through crowdfunding. One of the reasons Funding Launchpad became a founding member of both CFIRA and CfPA is because in its emerging stage, it is important to build an industry that keeps investment crowdfunding’s original dream alive – providing entrepreneurs with a new avenue for raising capital.
Following the crowdfunding industry? Building a crowdfunding platform? Please share your opinions on the state of the crowdfunding industry.
Good luck to you guys!
Great to hear you’ve joined the CfPA as well! I think they’re doing a good job at getting the crowdfunding show on the road while advocating for investor protection. Honestly, I think there’s enough demand for the sheer quantity of funding platforms popping up. Obviously every funding platform wants to become the Amazon or Walmart of crowdfunding, though, so I can see why you’re concerned about so many springing up–you want a bigger chunk of the business! But the fact is nearly every community could support a funding platform. In fact, many would probably prefer a local platform.
This is my prediction: these platforms will mostly die because 1) they won’t turn into the next Kickstarter or Indie GoGo and their founders will give up and 2) demand will eventually taper as the novelty of crowdfunding wears off. People will realize not every pitch to make the newest iPod accessory will lead to 10x returns. It’s ultimately good for the health of the industry the sooner this happens. When expectations get more realistic we can focus on the true promise of the crowdfunding paradigm: anyone can get involved in growing a key driver of the U.S. economy, small businesses. AND people can make a profit in the process if their judgment about which business to fund is wise. I speculate that the best investors will eventually turn a high enough profit to become certified investors. They’ll treat startup investments through crowdfunding platforms like buying stock; we’ll see small business angels using crowdfunding to get rich.
Crowdfunding is a truly revolutionary concept, and it has traditional VCs wondering if they’ll have a place in the years to come–Fred Wilson is of note among those questioning their future in the industry (http://gigaom.com/2012/05/08/fred-wilson-what-crowdfunding-means-for-the-vc-business/). That said, it has some kinks to work out. SEC rules will cover some of that, and I suspect a self-regulatory mechanism will become the standard for working out those kinks on the funding portal side. Indie GoGo and others have already begun talks about making a self-regulating organization. The other kink we’ll have to work out is expectations and demand. I think a key to working this out is to focus in on what we can do best as a funding platform; we have to identify a niche or otherwise a reason our service is different than every other platform out there. If you identify an area in which your platform team can add value you make it clear why certain demographics need your site. Without that purpose-driven mission there’s no reason for investors to choose your site over Indie GoGo (or GrowVC, or CircleUp, etc etc). But if you have clear value to add to their goals, your target demographic will already know why they want to work with you instead of every other funding platform–you’re tailoring the experience to their needs.
I hope I can bring crowdfunding to biotech and see if the buzz I’ve been hearing at scientific conferences is true. Can crowdfunding really save this sector? I don’t know, but I wager it can, and I’m going to put all my effort into making it happen. If my team can’t make it work for biotech then it can’t be done. I’m interested in hearing if anyone else has identified a niche market they want to focus on, and how they plan to address the needs of that market. Please share!
My URL is http://www.CrowdBioVentures.com; drop a note in the “contact” section if you’d like to chat!
I agree niche community platforms is seemingly how things will develop. I know some folks are working really hard on bringing “the platforms” to the communities.( which is imo a great play ) The technology of the platforms is is seemingly the easy part, keeping the community platforms within regulations and transparent may pose the larger hurdle. Whoever brings the full package of complete platforms and compliance will be a big winner.