BLOG: Crowdfunding: how wise is the crowd?
The Oxford dictionary describes crowdfunding as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet.”
This clearly positions it as a way of raising money – as opposed to a means of investing – and it is estimated that $5.1bn (£3.3bn) was raised globally in this way in 2013.
The ventures funded include social and charitable causes; artistic projects ranging from music to commercial films; inventions and business start-ups; legal claims and – close to our heart – property. Some of these are Rewards Based projects where, in return for your ‘donation’, you receive some goods or services for free, or even just the ‘feel good’ factor of having supported something you believe in. The rest can be seen as a financial investment where your return is either a fixed percentage (in the case of Debt Crowdfunding) or a share in the venture (in the case of Equity Crowdfunding).
In both cases, in order for you to get any return, the venture needs to be a success. This is where the ‘wisdom of the crowd’ becomes a factor. A joint study between Toronto, Canada’s York University and Universite Lille Nord de France, in Lille, France, published last year, showed that Investors are more likely to support “all-or-nothing” campaigns, where if the target is not reached nothing is paid, as opposed to the “keep it all” option where the sponsor keeps whatever is pledged whether they reach their target or not.
In my view, the key element of Crowdfunding is the word ‘Crowd’. Not just any crowd – but a mass of people that have common interest. For equity crowdfunding supporting start-ups the crowd has a shared passion, and a collective knowledge in entrepreneurial businesses. In CrowdLords’ case it is a common desire and a shared interest in property investment. It is the ‘wisdom of the Crowd’ which should determine which project is funded and which isn’t.
But how wise is the crowd? How often do they back the wrong ventures and miss the good ones? The truth is we simply don’t know yet. Only one equity crowdfunded business in the UK has got to the point that is has enabled investors to get a return and that was because they listed on the stock exchange.
At this time, throughout the UK, there are tens of thousands of Investors who have given millions of pounds to start-up businesses through Crowdcube, Seedrs and others. They would like to think they have backed the winners – including CrowdLords, as we ourselves have been funded in this way – but many of the investments may come to nothing.
There is speculation that the absence of success stories is leading to investors moving away from equity investments in start-ups and growing businesses and putting their money in “safer” investments. These include “Crowd bonds” (offered by the same Crowdfunding platforms) and Peer-to-peer (P2P) lending where they are promised an income at a set rate. These tend to come with lower risk and a proportionately lower return. P2P lending is in fact becoming increasingly passive and anonymous where the investments are made for you through Autolending and Autobid features – in my mind that loses some of the attraction of Crowdfunding in the first place.
However, CrowdLords and some of the other equity based property crowdfunding sites fill the gap between these speculative start-up investments and P2P property lending platforms. We bring the benefit of investment in the asset we trust most – bricks and motor (property). Investors are given access to a share in the success of a property venture because investors own part of the equity and so benefit from growth and income from the property.
We believe that Crowdfunding will only prosper in the long term where it is able to be rewarding both financially and emotionally. That requires transparency, active participation and the influence of the crowd in investment decisions, as well as at least some level of security through the inclusion of assets that have some inherent value.
In the US, the fastest growing crowdfunding segment is Real Estate and it’s showing no signs of slowing down. Here’s to the ‘wisdom of the crowd’.