Because crowdfunding as a financing option for business is less than a decade old, statistics are difficult to come by and even more challenging to vet. New companies offering crowdfunding and lending platforms are entering the market at an overwhelming pace, even without full clarity in regard to regulatory oversight or longstanding proof of business models. However, in its October 28th Observatory Digital Economy Report, BBVA Research speaks to the rapidly growing equity crowdfunding and lending environment around the world and provides an in-depth explanation of why the industry’s growth has been so exponential.
According to BBVA, in combination with Massolution Consulting’s annual report, the global scene for alternative financing by way of crowdlending reached an impressive 933 million Euros by the end of 2012 – an increase of 111% from the previous year – while equity crowdfunding reached 90 million, 30% more than 2011. The North American market is the greatest champion of the crowdfunding and lending space, capturing 59% of the total investment, followed closely by platforms in Europe that captured 35% of the total. It is clear that this unique alternative finance space is quickly reaching countless investors wishing to invest in growing companies, and BBVA has an opinion as to why this remarkable growth is taking place.
The report states that a powerful combination of three intersecting forces have allowed for the tremendous growth within the crowdfunding and lending space – the threat of an economic downturn that prompted the mobilization of supply and demand, the continual digital evolution that marries telecommunications and technology-based platforms, and the absence of regulatory compliance as it relates to non-professional investors.
First, as the economy shrinks in times of global financial crisis, businesses have no choice but to get creative. Banks start to restrict lending activity as was the case in the Great Recession of 2008 and 2009, especially for companies that are not yet well-established, but all the while the need for capital remains crucial to future profitability. Alternative finance companies have provided an option for growing businesses for decades, but at an arguably outrageous price. Companies needed additional, cost-effective alternatives, and the market responded. As the business-to-consumer market began to see unparalleled success in crowdfunding platforms based on reward incentives for investment, peer-to-business platforms began to pop up, offering an additional, more viable option for some businesses, at much lower cost.
Secondly, the marriage of technology and investor prowess created the perfect storm for crowdfunding platforms to see sustainable success. As more companies started to stray from traditional bank financing, the internet made it possible to connect interested investors with companies in need, and platforms focused on making that relationship mutually beneficial quickly gained momentum. Advances in technology and continual improvement in both crowdfunding and lending platforms can only lead to additional year over year increases in investments, as has been witnessed from the aforementioned growth.
Lastly, BBVA discusses at length the importance of the lack of regulation in the crowdfunding space. Referencing the delay in clarification of initiatives such as the JOBS Act in the US by regulatory bodies, the report states that growth within the industry can be directly correlated to the self-imposed transparency of those companies offering investment through these platforms. At this time, only accredited investors are allowed to participate in equity and debt crowdfunding initiatives, allowing for both measured growth as well as protection for investors and companies alike. Future growth, however, may be even greater than recent years, as these restrictions are clarified further and non-professional investors – those who are not deemed accredited – are allowed to participate.
BBVA mentions a handful of specific platforms that are worth highlighting, including those focused on equity loan platforms, lending financed with notes, those that act as bond intermediaries, financing through discounting invoices, and true equity crowdfunding platforms. Of the 344 finance crowdfunding platforms within the United States, only one U.S. company is mentioned as an option for growing companies seeking a credit line backed by outstanding invoices – P2BInvestor.
Crowdfunding has been deemed a disruptive model in alternative financing as these platforms were initially focused on companies that may have been previously denied traditional financing through banks. More recently, crowdfunding has become the first choice in raising capital for all growing businesses – instead of simply an alternative when bank financing is not available.
In addition to the opportunities to connect with individuals who are willing to fund loans for working capital, crowdfunding allows companies to organically spread awareness about their unique missions. This creates a situation where crowdfunding plays an integral role in the expansion of new and established businesses, provides an invigorating boost into the economy, and offers an additional investment option for those willing to take on the type of risk crowdfunding presents.
BBVA Research believes that – based on the three crucial aspects of crowdfunding continuing to move forward and the addition of new platforms for both equity and lending opportunities – the industry will continue to experience tremendous success well into the future. As a proven player in the market, P2BInvestor is poised to facilitate additional growth within the crowdfunding space to benefit both investors and businesses.
The full report from BBVA Research can be viewed here. Please note it may require translation.