When most people think of crowdfunding, they likely think of a group of individuals pooling their funds to help a worthy cause. It’s not so much about a way to make money. It’s about being able to give back or being the first to get your hands on a new and interesting product. And generally, that’s how the whole idea got started.
However, like all new adventures, over time things change. In the case of crowdfunding, what started out as a simple tool to allow the haves to give to the have-nots has grown into something else.
Kiva.org Microlending Trend becomes Crowdfunding
According to the Mashable post, “The History and Evolution of Crowdfunding,” while microfinancing has been around for centuries, it came into its own in the mid-1970s through a research project launched in Bangladesh.
Its current iteration started in 2005 with the microlending website Kiva.org. Kiva established a platform that allowed individuals to lend in small amounts to poor, rural entrepreneurs around the world. The return rate has been nearly 99 percent.
In 2006, Prosper.com took microlending a step further by creating a peer-to-peer lending website. Borrowers could finance most anything, from a small startup to a family vacation. The benefit: interest rates were lower than financial institutions.
It wasn’t until 2009 that Kickstarter.com jumped into the fray with another new twist along with a new name: crowdfunding. Now instead of lending, crowds of people would pool their money for a concept – new product or idea – and in return, they would receive an incentive, such as a sample of the new product.
Next Twist in the Crowdfunding Story
There are four types of crowdfunding formats, according to the May 2012 Crowdfunding Industry Report by Massolution.
Equity-based and lending-based crowdfunding are designed for financial return and more closely resemble traditional financial lending. The other two are donation-based and reward-based crowdfunding, which focus heavily on cause-based campaigns.
While lending-based is the smallest in terms of available opportunities, this area is growing at a similar pace as donation-based crowdfunding. Although this still appears to be slower than the reward-based category.
Awaiting action by the Securities and Exchange Commission (SEC) on the JOBS Act slowed the growth in equity-based crowdsourcing until now, according to HispanicBusiness.com.
So far, most crowdfunding projects have been a way to get consumers a chance to back products not for financial gain but to support a cause or to get first dibs on the product if it’s created…But due to a provision in the Jobs Act, there’s growing interest in using the concept of crowdfunding for entrepreneurs to lure in investors and raise financing.
The Massolution report agrees. Equity-based crowdfunding is the fastest growing of the four categories, at 114 percent. Combined with lending-based crowdfunding, it raises the largest sums of money per project.
Previously only wealthy investors could invest in a startup for an equity share. The JOBS Act focuses on changing that, as soon as the SEC can ensure there are sufficient safeguards. Thus far, there isn’t a mechanism. However, the expectation is that equity-based crowdfunding is ready for mainstream. It will be a new day for business financing when we get to that curve in the road.