Wednesday, June 6, 2012

The Next $300 Billion Industry

Crowdfunding. Here's why:

In 2011, about 1.2 million projects were successfully funded through CrowdFunding platforms, totaling about $1.5 billion.

Projections for 2012 by industry experts reflect growth to $2.8 billion, and that's with many sitting on the sidelines, waiting for the SEC to codify the recently passed legislation that will open up the floodgates of equity-based CrowdFunding. As I write, entrepreneurs are pivoting to the most efficient business model (and they are years away from finding it) and business leaders are tackling the SEC Act of 1933 (more on that later).

So why does venture capitalist Fred Wilson predict CrowdFunding will grow to $300 billion? Among other reasons, advances in technology, social media infrastructure, and payment systems along with democratization of capital markets create a perfect storm for growth.

Technology. The ability for online platforms to create an efficient, low-cost mechanism to bring multiple small-dollar investors together did not exist very many years ago. The reality is that equity-based CrowdFunding, or the concept of raising money from people in your network, has been happening for years, but mostly without the benefits of technology and automation.

Social Media Infrastructure. People trust blogs more than brands and advertising. People poll their FaceBook friends to find a good mechanic. People have digitized their networks using social media infrastructure, meaning the crowd is already assembled and ready to "play." One interesting validation is this point: people are starting to pay more attention to and care more about their "social" credit than their financial credit.

Payment Systems. Innovations in payment systems now enable micro transactions, like $20, $5, and even $1, to be completed for a relatively low cost.

Democratization of Capital Markets. The JOBS Act, signed by President Obama in April 2012, represents the first significant innovation to a 79-year-old piece of legislation called the Securities Exchange Act of 1933. Yes, it came out shortly after the Great Depression when many individual investors had been duped into unscrupulous and fraudulent purchases of various securities. The purpose of the Act was to create the SEC, whose mission is to protect investors. The result of this is that if you make less than $200k per year and have a net worth of less than $1 million (excluding your home), you cannot invest in privately-held businesses. The JOBS Act, however, gives the power back to the people. CrowdFunding will empower anyone to allocate a portion of their investment portfolio to privately-held companies, from Startups to thriving businesses. And predictions are that the money will flow quickly and freely into these markets because entrepreneurs are starving for the capital and investors are looking for something more than the stock market returns and less than .5% interest from their savings.

Equity-based CrowdFunding is working well in the UK, Eurozone, and Australia so far, but all eyes are on the SEC to see what regulatory model they employ for this new type of security. The SEC has until Jan 1st, 2013 to issue their guidance. Then the real growth in CrowdFunding will happen.

In my opinion, CrowdFunding has an opportunity to be larger than $300 billion. Fred Wilson came up with his number based on a small percentage of just unaccredited investors's money. That's assuming accredited investors, angel groups, venture capitalists, private equity firms, insurance companies, and other institutional money managers won't put a single dollar into CrowdFunded companies and projects. I just don't think that will be the case. In fact, I could make a good case for CrowdFunding becoming a major source of deal flow for the accredited investment community, meaning the potential size of this industry could be much larger than predicted!