CfPA Study Shows Optimism–And Some Confusion–About the Future of Crowdfunding

The Crowdfunding Professional Association recently conducted a study to see what relevant parties actually know about crowdfunding and what they think about the future. They had 442 respondants of which 287 were entrepreneurs, 166 investors, 179 intermediaries, and 11 were unspecified. Some of the findings were surprising, and though respondents admitted that they are not entirely clear on what the future holds for crowdfunding, they are optimistic about the opportunities that it could soon afford them, both as investors and as entrepreneurs.

Of the entrepreneurs that responded, a whopping 30% came from the technology sector. This seems understandable, since many tech startups in Silicon Valley are interested in using crowdfunding to reach out to the capital resources that surround them but are often hard to connect with in the traditional ways (e.g., bank loans, VCs, angel investors, etc.). The next biggest industries were media and entertainment (10.3%), finance (9.87%), and consumer goods (9.44%). The rest fell into the Other category (19.47%), which included industries such as space and robotics, energy, health, beauty, medical devices, and etc. The stages of business and goals of the entrepreneurs were widespread:

  • 15.88% only had an idea so far; 33.48% had a formal business plan; 27.04% had a product or prototype created; and 23.61% were already operating and bringing in revenue
  • 81% of those who responded to questions about their business’ 2011 revenues said they made under $100K; 15.7% made $500K- $1 million; and 1.65% had revenues between $1 million and $5 million and another 1.65% had revenues over $5 million
  • 79.39% of the companies had 3 or fewer employees, and 44.05% were operating with only one. 41.24% said that one of their primary reasons for raising money through crowdfunding would be to increase the number of employees they had working, preferably to five or more.
  •  36% of respondents said they would like to use crowdfunding to raise capital for the first time, and 25% said they had experience in startups previous to the project they were working on currently.
  • When asked what kind of funds they were looking to raise through crowdfunding, 36.64% of entrepreneurs were hoping to raise under $100K; 35.34% wanted to raise somewhere between $100K-$500K; 16.81% wanted $500K-$1 million; and 11.21% wanted to raise over $1 million through crowdfunding. The new rules that the SEC is discussing in conjunction with the JOBS Act state that companies will be able to raise up to (but no more than) $1 million per calendar year through crowdfunding, and the vast majority of these companies fit easily within that framework.
  • Finally, the entrepreneurs showed that they were most interested in either portals that had a lot of visibility or that were industry-specific. 36.67% said they would want to use the most visible portal or platform if they were to crowdfund, and 34.34% said they would use one that was industry-specific. Only 14.74% were interested in regional platforms.

The investors that responded were mostly non-accredited but showed a great interest in getting involved in crowdfunding:

  • 71.43% self-identified as non-accredited investors; 28.57% were accredited
  • On average, the non-accredited investors hoped to invest $4,347 per year and the accredited investors were looking to deploy $29,987 per year.
  • Investors said they wanted to invest through crowdfunding for a number of reasons: 41% cited a desire to help companies get capital where they couldn’t before, 44% wanted to be a part of something bigger than themselves, and 35% wanted to make a difference in the life of an entrepreneur
  • When asked what their number one biggest driver would be in making their investment decisions, only 33% said investment returns. Many cited altruistic reasons for wanting to use crowdfunding: 20% said helping companies get capital where they couldn’t before, 20% said being part of something bigger than themselves, and 17% said the ability to make a difference in the life of an entrepreneur.

While this suggests that crowdfunding is garnering a lot of support from both entrepreneurs and investors, there is also evidence that people are not entirely clear on the provisions in the JOBS Act yet, and they have some fears about the rapid growth of crowdfunding.

When asked, 68% said they were very familiar with crowdfunding in general, giving themselves an 8-10 out of 10 on their clarity of understanding. Given that the sample was  pulled from a survey on the CfPA site, this makes sense. On the other hand, 36.64% ranked themselves 5 or lower on a scale of 10 on their understanding of the differences between what is currently allowed and what will be allowed under the JOBS Act when it goes into effect in 2013. Though they admitted to not understanding the specifics, most people said they understood the general implications of the new regulations and 20.14% gave themselves a 10/10 for understanding the implications. The big ideas are pretty clear; the details, not so much. If you are interested in equity crowdfunding and want to learn more about the details of what the SEC is working on, click here.

Due to the still-ambiguous nature of the SEC’s provisions regarding the JOBS Act, people remain unsure of what to expect in 2013, and express some fears regarding the rapid increase in crowdfunding–it’s set to double in 2012 alone, before equity crowdfunding even becomes an option. Surprisingly, the top fear is not fraud. Respondents were more concerned about a lack of business prowess (they rated it a 3.07/5 in terms of concern) and lack of entrepreneurial education (3.07). Fraud was third on the list (3.05). Behind that, they listed a concern over investors’ levels of sophistication (2.98) and information overload (2.84). Also surprising regarding fraud was the finding that those who reported to be ‘investors only’ ranked their concern over fraud somewhat lower (3.02) than ‘entrepreneurs only’ (3.11), perhaps because investors feel they have some control over whether or not they buy into a scam, whereas for entrepreneurs scams could derail all hopes for crowdfunding and leave them with fewer options.

The report suggests that the outlook is hopeful in terms of fraud prevention. The authors look to debt crowdfunding, wherein investors advance money to entrepreneurs and are paid back with interest, which they believe is similar to equity crowdfunding in terms of risk. So far in the United States debt crowdfunding statistics are showing low or no default rates. Furthermore, the UK has allowed crowdfunding for two years and Australia has allowed it for seven, and neither has reported any incidences of fraud.

The study goes on to say that not only will crowdfunding portals be required to provide oversight, but the masses can, in a sense, “crowdsource” their own protection. The study says, “Experience has already shown that potential sponsors are able to collectively crowdsource a startlingly effective due diligence machine far better than the eyes of a single Wall Street analyst. They are able to shed light on every aspect of the business.”  With any luck, crowdfunding will create a transparent method of investing in projects that people feel personally connected to and involved in throughout the process.

Here at Launcht, we think this study provides some important takeaways beyond the numbers. First, the study makes it clear that crowdfunding is proving, yet again, to be about more than money. Entrepreneurs want to use crowdfunding to add jobs to their new companies, helping to improve their work and the American economy; investors–even those who are not accredited–want to join in the cause and donate money to help make this happen. 33% of investors said their number one reason for taking an interest in equity crowdfunding was profit-driven; 57% chose an altruistic reason. This desire to help builds community, encourages investor involvement in projects, and employs skilled workers in projects that are multifaceted and involved. This adds to our conviction here at Launcht that social entrepreneurs have an edge in future crowdfunding and should continued to get involved in the process.

Furthermore, the study shows that we trust each other, perhaps more than we trust Wall Street right now. Respondents are more worried about their business knowledge and abilities as entrepreneurs than they are about people trying to dupe them. People want to produce quality projects that others will support, and we can hope that support will come not only from funding but from the security we can all provide to one another by carefully monitoring the projects we fund and making sure they have no hints of fraud.

Essentially, what we see from this study is that crowdfunding will empower us–to support the projects we care about, to protect ourselves, to choose exactly how we invest our money, and to grow our economy through business creation and job development. If you, like many of the respondents, feel unclear on what equity crowdfunding means or what is happening in the SEC, check out our equity crowdfunding blog. For more information on how you can make crowdfunding work for you now, click here.

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