Crowdfunding the future – why peer-to-peer finance is no longer just about tech
Crowdfunding sites are all the rage right now. Kickstarter and Indiegogo have given start-ups a new way to gain exposure and lift their brand off the ground. The approach is also revolutionising established industries though, from real estate to banking. In this article, I look at how crowdfunding is having a transformative effect on investment and how it will continue into the near-term.
"Crowdfunding" only appeared in its current form around five years ago. It's still a new funding method and as such could be expected to be viewed tentatively by businesses. Recent data suggests this isn't the case: crowdfunding now accounts for more overall funding than the typical annual investment offered by venture capitalists.
The benefits of crowdfunding approaches are being noted by traditional industries. Market sectors that may not seem to be a natural fit for the model are embracing its flexibility and low entry requirements for investors.
Start-up Fundrise offers a "whole new way to invest" by letting you purchase small shares in urban real estate developments. These shares sell for as little as $100, a stepping stone that opens the market to scores of new investors.
Last year, online crowdfunding platforms accounted for $484 million of investment in real estate projects, according to a report from Bloomberg. There's over 125 websites specialising in real estate funds, although not everyone relies on the mainstream platforms.
More recently, there have been indications that unscrupulous companies could use crowdfunding platforms to raise money quickly for fraudulent use. The regular risks of crowdfunding are significantly amplified at this kind of scale.
Real estate isn't the only "old" industry that crowdfunding is disrupting. It's also having a profound impact on the banking sector where new peer-to-peer lending sites offer a compelling alternative to bank loans. Sites such as Zopa and LendInvest let individuals borrow money from other users. The people who lend the funds act as investors and are paid back a monthly fee.
This model has gained popularity since the worldwide financial crisis. The low interest rates offered by regular banks have made "alternative" approaches more appealing, a spokesperson for finance company Hargreaves and Lansdown told New Scientist in 2015. The firm pointed out that investors on LendInvest can see 6% returns, compared with a then-0.5% from the banks.
While it's not as stable as some investors would like, crowdfunding is clearly a viable funding route for the firm seeking the money and the participants providing it. It can be expected to gain more credibility as people become familiar with the concept and its applications outside of tech.
Enjoyed this excerpt? Read my full report on Digital Journal for much more detail on crowdfunding's applications outside of tech.