crowdfunding displacing deep pockets – will it drive greater impact?

crowdfunding-and-impact-ljsalazar-consulting-blog

Twenty billion dollars strong and with a double-digit annual growth rate, crowdfunding is a staggering one-third of the venture capital industry, and at near parity with Angel Investing. The power of the crowd goes beyond private investing and also makes a significant dent in the philanthropic sector with eighteen billion dollars donated online in 2015, growing five times faster than the sector as a whole. As crowdfunding displaces deep pockets, will this tectonic shift result in more social enterprises and more accountability or will we just witness more of the same?

It’s easy to overestimate the short-term and underestimate the long-term impact of new technologies that spur systemic changes. Just six years ago, the crowdfunding industry at $800M per year was showing significant promise, but most skeptics dismissed it as a novelty. Today, companies like GoFundMe have processed more than four times that amount, with over two million campaign organizers and 25 million donors representing the perfect venue for philanthropic causes.  With over ten million users and $2.3B raised to support over 100,000 projects, Kickstarter is often the first consideration of many entrepreneurs seeking capital.

Whether it is a company raising capital through debt, equity, and pre-sales or a cause raising philanthropic money, the common element is a significant number of backers, charging their pledge to their credit card of choice, from the convenience of their mobile device.

The ubiquitous mobile web combined with the power of social networks and the convenience of micro transactions online, resulted in the perfect combination to disrupt the status quo and create a seat at the table for many that were previously left out by traditional investing and donor systems.

The crowdfunding sector as a whole has passed $20B in North America and $40B globally, as per trends reported by Massolution in their 2015 Crowdfunding Industry Report. The sector is doubling or more, every year, spread across several types of funding models including rewards, donation, equity, and debt/lending and its impact is observed everywhere, from small local projects to funding game-changing technologies and even in presidential elections. We’re witnessing how the aggregated power of tens of thousands of sub $1,000 investments and donations are shaping the entrepreneurship, philanthropic, social and political scenes.

According to the World Bank, by 2020 Venture Capital and Angel Investing will be displaced by crowdsourcing in terms of volume of money and number of transactions.

That is a whopping $90B for startups that will come from the crowd, not from traditional Venture Capital Firms or Angel Investors.

crowdfunding-2015-2016

But not only entrepreneurs are chasing the masses, as the same technologies that enable new funding models for tech companies, small businesses, and social enterprises are also reshaping charitable giving. Operating non-profits seek to embrace the trend by deploying Social Funding strategies that combine the reach of social networks and the convenience of microtransactions.

According to Giving USA 2016 and IRS figures, roughly $18B were donated online in 2015. And while most of the giving comes from 10 million High Net Worth Donors who gave $142 billion, the dormant beast lies in the 85M households with a liquid net worth of less than $100K  who gave $67B but have a low participation rate of less than 17 percent. If, thanks to crowdsourcing and matching technologies, this sector achieves the same participation rate of the super wealthy, the charitable organizations in the US would see an influx of more than $220 billion per year.

The emergence of new technologies is shifting the power to define the agenda. Systemic change is likely to spark from these innovations as Social media influencers with 100K followers that can invest or donate $100 each have the same power as ten wealthy individuals at $1M each.

This shift is a welcome change, but it does not mean that more social enterprises or more impactful giving will exist as a consequence. There are systemic issues that must be addressed in both the private and the philanthropic sector related to the real measurement of impact from the billions of dollars in charitable giving and in funding social enterprises.

As technology remove friction from charitable giving and from raising funds for private enterprises, technology can also help to provide transparency on the impact, facilitate benchmarking and feed a virtuous cycle of co-learning. Access to this knowledge will allow us to move one step further, beyond democratizing Startup Investing and Social Funding, to providing a window into the success of the money invested.

Without addressing these core issues, we might end up just repeating the same mistakes, but at a much broader scale.

sources:

  • By the numbers, 36 amazing Kickstarter Statistics, 2016
  • Crowdsourcing.org 2015CF Crowdfunding Industry Report, May 2015
  • Giving USA 2016 report
  • IRS
  • Chance Barnett Forbes Magazine Online – June 2015