Equity- and debt-based crowdfunding could help U.S. businessesWe've reported here about the JOBS Act, which is designed to make it possible for small businesses and startups to use social media and friends-and-family networks to raise investment or debt-based capital through "crowdfunding." U.S. entrepreneurs won't be able to take full advantage of this practice until the SEC establishes rules (expected by January 2013), but a report released yesterday shows the significant amounts of money organizations around the world have already raised using several different crowdfunding approaches.
According to the crowdfunding research firm massolution, 452 crowdfunding platforms worldwide raised a total of $1.5 billion for more than 1 million campaigns in 2011. Massolution reports that the majority of those campaigns were in the donation-based crowdfunding category, which is unregulated in the U.S., and that North America was the largest market for fundraising with $837 million raised by 532,000 campaigns.
But outside of the U.S., in places where equity-based platforms are already legal, large sums have also been raised from crowds of investors. These platforms, primarily based in Europe, raised the largest sums of funds per campaign, according to massolution. More than 80 percent of equity-based crowdfunding campaigns raised more than $25,000 each.
In 2012, massolution predicts that $2.8 billion will be raised through all types of crowdfunding. That's based on their projections of 300 percent growth in equity- and rewards-based funding, 75 percent growth in lending-based crowdfunding, and 50 percent growth in donation-based crowdfunding worldwide.
"As large sums can be raised via crowdfunding, it has become a viable alternative for capital formation for new commercial ventures, projects, and social- and community-based initiatives," said Carl Esposti, CEO of massolution and founder of Crowdsourcing.org.
"Driven by equity-based and reward-based crowdfunding, our forecasts indicate total funds raised will nearly double this year. Additionally, the passing of the JOBS Act will have a profound effect on the growth of crowdfunding in the U.S.," Espositi said. "In 2013, securities-based crowdfunding will bring new sources of funding to many startups and early stage businesses."
The massolution report looked at four types of crowdfunding: reward-based, donation-based, equity-based, and lending-based.
Reward- and donation-based crowdfunding offer no return on investment to funders, and are most commonly used for social causes and projects. But startups and small businesses can use equity- and lending-based crowdfunding to raise capital and offer a return to investors.
Equity-based crowdfunding, as defined by massolution, is a model in which funders receive an interest in the form of equity in the venture or revenue- or profit-share arrangements. In the lending-based model, lenders receive fixed periodic income and expect repayment of the original principal investment. It includes peer-to-peer lending, peer-to-business lending, and social lending.
Massolution deems equity-based and lending-based crowdfunding, in which the funder seeks a financial return, to be the most effective for digital goods such as software, film, and music. These categories on average raised the largest sums per campaign, the group reported.
The report is based on a crowdfunding industry survey conducted in the first quarter of 2012 and on qualitative research aimed at profiling the global crowdfunding industry. For more information, see Crowdsourcing.org.
