Crowdfunding can be a daunting place to invest. There are a slew of firms looking to raise – and they’re often hard to tell apart. Last time I looked, everyone and his dog was trying to launch a craft brewery – and not all of these will succeed.
When you’re backing small private firms, the outcome of a bad decision can be a total loss of your investment. On the upside, the wins can be large – and rapid. But how do you find and appraise all the investments on offer? You need to get rid of the garbage, and find the winners – and that’s not easy, with thousands of firms looking to raise.
Today, I’m going to be talking to Emily Mackay of Crowdsurfer – a firm that helps make sense of this confusing muddle. They want to be the tool that you use to find the golden needles in the crowdfunding haystack. Don’t miss the end of the interview – where Emily gives her long-term predictions.
AL: Please can you tell us about your firm?
EM: At Crowdsurfer, we are building the global data intelligence service that underpins the fast-growing crowd finance industry.
We cover hundreds of platforms and all forms of crowd finance – loans, equity, rewards, donations, bonds and more. Through this, we help fundraisers, investors, and those responsible for tracking the industry to navigate the market. This helps them to make informed decisions quickly.
For investors, our intelligence platform provides the most advanced deal discovery functionality available – and it also has the broadest coverage of the market. It allows users to discover the real investment opportunities, and start making returns from the industry.
AL: Why are investors turning to crowd finance?
EM: Investors are being both pushed and pulled to crowd finance.
On the push side, we see investors being driven away from conventional investments. The causes include: the financial crisis, volatile or suppressed markets; and markets dominated by the largest institutions. These make it difficult for most private investors to make their money work for them. Crowd finance is offering a new opportunity for investors to generate better returns, using efficient online marketplaces.
On the pull side, crowd finance has made it much easier and cheaper to create a diverse portfolio of investments. In a time of uncertainty, this diversity is attractive – and it would be difficult to replicate, if the process was reliant upon using intermediaries to spread your risk.
AL: What are the challenges for an investor?
EM: Investors are struggling to navigate a disruptive and fast-growing industry, particularly bearing in mind the range of potential investments available. The crowdfunding scene is developing so quickly that it’s difficult to understand. Investors have to discover what opportunities are available, compare them, and build sufficient understanding to participate comfortably. No-one likes to be overwhelmed, so there needs to be a way to find clarity through the noise.
Also, compared with other financial markets, crowdfunding does not have the same availability of performance data for investors to use when making investment decisions. The platforms themselves normally pretty transparent – seeking to make available the information they have. However, this is still lighter than what most investors will be typically used to. This is due to limited historical data, and because many of the businesses seeking investment are privately owned. This makes pre- and post-raise performance difficult to monitor, compared with publicly listed businesses. Over time this market will mature, and we’ll move towards the richness of historical information that the traditional financial world has.
AL: How did Crowdsurfer begin?
EM: About 6 years ago I launched the UK’s first community shares crowd finance platform to make cooperative membership opportunities visible and investable online. I was also a first member of the UK Crowdfunding Association (UKCFA). Whilst I was a platform owner, I saw first-hand the difficulty that platforms had in being able to talk about their rapidly growing industry. They lacked industry intelligence, and couldn’t readily offer interpretations of the numbers and messages. The traditional financial services had such richness of information – but crowd finance had almost nothing. Trying to educate potential investors, campaign owners and the press was a near-impossible challenge; without any data analytics or hard numerical facts to turn to. Without any data intelligence, how can you describe an industry’s growth, market potential, diversity, richness, and point to precedents and trends? You can’t.
So together with my co-founder, Nick Brook, we started building a global data intelligence service, called Crowdsurfer. We’re excited to be supporting a future where crowd finance is the norm and trillions of dollars will be moving round the world.
AL: What surprises investors most about the crowd finance market?
EM: The scale and diversity of the investment opportunities already available are the most surprising thing for most people. To many, when investors hear crowd finance they think only of equity crowdfunding for consumer product startups. Most people think there are just a handful of such firms, and they can maybe name 2 or 3. Actually there are thousands of platforms worldwide presenting opportunities in SMEs, property, energy, student loans and much more.
For example, crowd finance allows you to own part of a sustainable fishery in South Africa, build a property portfolio in UK commercial property, back a venomtech business or put sustainable energy infrastructure into Africa. You can back the next generation of emerging high-tech businesses, picking off the themes or geographies that chime with your interests, and ensure your capital goes into socially beneficial opportunities.
If you’d prefer to delegate some of the decision making, you can even invest in funds via a platform, who are using the distributed nature of crowd finance to reach significant untapped capital for onward investment.
I love that web technology is connecting people financially on opposite sides of the world, distributing risk and decision-making, and even setting the price of money. It’s a powerful social force riding on scalable technology, the possibilities are endless!
AL: What does your data tell us about what people invest in, and why?
EM: There is no general rule as to what investors invest in, and why – as yet. The industry is emerging, and lots of ideas and niches are being tested with new services.
Marketplace lending has received the most backing to date, and has been particularly attractive to institutional money. £2.7bn in loans was raised in the year ending 31 March 2016, compared with £200m in equity crowdfunding. Equity crowdfunding, whilst smaller, is growing quickly (up 33% in the first half of 2016, compared with with the second half of 2015).
Property crowd finance (both lending and equity) has become a sub-category in its own right over the last 12 months. It has attracted a lot of investment (over £700m to end of March 2016), with hundreds of platforms emerging worldwide to serve real estate deals in the last 5 years.
AL: What are the most exciting firms you’ve come across, as a result of working in the CF space?
EM: We love to see entrepreneurs pushing the boundaries to democratise access to finance, and making it more efficient. The platforms that are defining their industry, and society, in some way are the ones that are the most exciting to us. Mintos (Latvia) and Solvesting (Kenya) are bringing the fundamental concept of crowd finance to new geographies, forging the way for an industry to develop.
Invest4Justice (US legal case investment platform) and Prodigy (student finance bonds) are taking the crowd finance principles and technology, and are building new models that solve new problems.
The property, loans, and SME equity platforms are exciting in demonstrating that platforms can scale up: Ratesetter, Funding Circle, Prosper, LendingClub, SoFi, Crowdcube, Seedrs, Lendinvest.
We particularly love all those platforms who are working to bring about social and environmental improvement, as it accords so much with the crowd finance philosophy: KIVA is bringing micro loans to developing world entrepreneurs, Abundance is offering renewable energy investments to the everyman, and GandengTangan is backing social entrepreneurs in Indonesia.
Also, there are a wave of providers who sell crowd finance technology directly to fundraisers (particularly those that are responsible for continuous raising). This is exciting as you are seeing a very long tail to the industry. Investment managers, and corporate finance brokers are adopting the technology to lower their costs of raising financing. Access to the crowd also means they can more easily expand their pool of potential investors.
AL: What will crowd finance look like in 2, 5, 15 and 25 years?
EM: In the next couple of years we’ll see the US market steadily increase its activity as platforms and investors get their heads around the new regulations. Europe will hold its lead position with steady growth, but other markets will follow in its footsteps. The volume of trade, and number of platforms, will continue to grow apace in emerging markets: Asia, Africa and the Middle East.
We’re not expecting any sudden moves in the next 24 months, but rather steady growth and scaling up. Uncertainty in European economics will dampen explosive growth, but that’s by no means a bad thing: steady and sure wins the day. In 5 years, we’ll have a more mature industry. By this time, data will be richer – both in the deals presented and the historical track records of platforms and projects backed. Lower quality services will have churned away. We may see big, established financial and consumer names making a move into crowd finance, to augment or complement their existing services.
15 years out is a very long time in such as fast industry, but by 2031 I think we’ll see crowd finance considered entirely the norm, adopted by the mass market in all developed markets. The newly connected internet population will froghop the offline stages the rest of the world has been through, and adopt marketplaces directly alongside other online and mobile money services. We probably won’t call it ‘crowd’ finance any more, it’ll just be how we get funding, ‘online funding’ or ‘marketplace funding’ perhaps. Blockchain will be used for some execution (e.g. shareholder records) and the market will be at the scale needed for healthy secondary activity.
25 years out – this really is crystal ball gazing now! By 2041 online finance will permeate many areas of our lives. Universities will have partnerships with loans platforms, so new students will apply for their funding and uni place in one process. Businesses go first to online services for rapid, efficient funding, severely impacting banks’ lending businesses as we know it today. Traditional banking services will be much reduced, or forced to partner or merge. Big brands will be pre-testing all new product releases as standard with ‘the crowd’ first. Offline angel groups will have had to evolve into a platform, or join forces with one, to get to the best investment deals. Retail investors (millennials will now be in their 40s and 50s) will expect much more control over their investing, and outcomes, and will be very discerning about where their money goes. They will diversify over a range of geographies and types of investment, using digital currencies, and seek out socially impactful entities over ‘blind’ stock market and fund investing, which by then will be in decline.
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