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More a Whimper Than a Big Bang?

Reflecting on a slowish start for Equity Crowdfunding in the USA – are there real issues and, if so, what are they?

I engaged in an interesting debate a week or so ago which was responding to an article reflecting on what the author perceived to be a comparatively modest uptake of equity crowdfunding in the USA since its broadest introduction in 2016.

The key numbers for 2016 are (according to Sherwood “Woody” Neiss) 186 campaigns launched of which 79 were successful raising around $18 million.

The numbers are modest but not terrible and after all – size is not everything! That said it is fair to say that, because the gestation period from the fanfare of the JOBS Act to its full enablement was so long, the sense of anticipation was such that many, quite reasonably, expected something a bit more demonstrative.

Given the size of the market and the relative maturity of the reward based crowdfunding models in the USA, and further still the degree to which entrepreneurial activity has been driven by equity finance compared to the Bank led finance of Europe, it was reasonable to expect that it might have had a warmer reception.

The debate on the relative performance was, however, an interesting one and in large part seemed to fall into two philosophical camps. Those that regarded this as a failing born of an unwillingness to adopt more traditional methods of marketing and selling equities and securities and applying them to the nascent equity crowdfunding scene in the USA. The deep irony of lamenting the poor performance of intermediaries to adequately “sell” in a philosophically disintermediated process seemed lost on those advancing this view. The other camp, of which I was one, consisted of those that think that it is this very attitude of treating crowdfunding as being simply an extension of existing traditional finance and an unwillingness to see its distinctive philosophical and practical differences which is mis-setting expectations for participants and causing the growth to lag.

But, in a way, both sides of the argument are probably right and it is just a bit of a case of chicken or egg.

The origins and difficult birth of equity crowdfunding in the USA have, in my opinion, undoubtedly miss set the expectations for participants and stymied growth to the extent that equity crowdfunding in the USA, at a Federal level at least, does look like a timid version of the more unpleasant aspects of old world capital. The SEC’s reluctant and piecemeal introduction of overly complex legislation to make equity sales to retail investors possible delayed the “crowds” participation and allowed existing capital market players to get early site and activity in the process. This, in large part, seemed to set the tone of the interaction. This early misstep was exemplified by a rash of “World Conferences” in the US which presented the depressing sight of minor Wall Street veterans pontificating on a subject they really didn’t understand and simply viewed as an opportunity being presented as “experts” and “thought leaders”. This did not bode well and so it proved. Not least because these old players were able to portray themselves as the “trusted” intermediaries and kingpins as they got first dibs. Unsurprisingly they could present themselves as the “go to” advisers for retail “unsophisticated” investors when they were finally were allowed to become active in the equity crowdfunding sector. So you have a disintermediated process intermediated, and you have old world thinking driving the interaction. Not a good start. IF they are doing a bad job of selling the proposition becomes something of a moot point as the brakes were already on.

Similarly, the restrictions placed on the size of raise $1M in any given year – this is just too low and constrains the applicability of crowdfunding to too narrow a group of participants and suggests it is only of use to micro or new businesses. Secondly the constraints on how to present and pitch to the crowd being bound up in theolf=d world language and terms are both bad and serious impediments to growth for the sector. Here’s why. If you make it difficult for a crowdfund campaign to directly appeal to a wider set of motivations inherently present in a crowd you are constraining the whole essence of crowdfunding. This is an issue in the UK as well but the reticence of pitches to be more emotional and less financially rational is compounded in the USA by the highly litigious nature of society there.

In sum then we have a situation where poorly informed regulators have stymied growth by miss setting the terms, giving an advantage to established capital market players, constraining how appeals can be made, constrain ambition and to all intents and purposes set equity crowdfunding in the USA up as a poor relation of old world capital. Hardly surprising that the market isn’t booming. So if I were reflecting on the challenges faced by the emerging US Equity crowdfunding sector it would not be so much its modest start but the difficulty in distinguishing it from old world capital! If crowdfunding cannot differentiate itself from what has gone before it is truly missing the real opportunity, and so too are the investees missing out on the true benefits.

But let us not be too smug over here. In the UK we had the advantage that our Common Law system allowed equity crowdfunding to get underway under its own steam within existing frameworks. This meant that from the beginning it was a more renegade and counter-cultural approach as it was not driven by existing players but new entrants.  The FCA are, however, trying their best to turn back the clock by introducing similarly daft ill-conceived regulations. They still operate under the illusion that they somehow “made it happen” They didn’t, it happened in spite of them not because of them and they need the humility to learn a bit more about it so as their approach is properly informed.  That way they will avoid compounding their earlier mistakes where they sought to introduce“crowdfunding” specific regulation which fails to differentiate it from other funding in any meaningful way and nw, by their own admission, are facing challenges and risk created by “regulatory arbitrage” and lack of transparency and comparability.

And not all is lost in the US either. The entry of very popular platforms like Indiegogo into the equity arena has to be a good thing. It exposes the idea of equity crowdfunding to a wide range of people familiar with the reward or perk based model and, in so doing, “legitimises” it to the crowd. I wish them every success.

There are even moves to “FIX” the legislation with proposals making their way through the political process – but who knows how that will proceed.

I am also interested in the intrastate crowdfunding which emerged as a result of the delay in the full implementation of the JOBS act. A number of States wanting to push ahead introduced legislation for equity raises within the borders of individual states. The variety of model makes for an interesting laboratory worth reviewing and monitoring for new and novel ideas which might see wider implementation.

So maybe equity crowdfunding’s muted growth in 2016 is a reflection of poor “selling” and marketing by intermediaries. If it is it just shows how bad the US model is and how those charged with implementing it simply don’t get it.

Question is will it change? I have my doubts.

Scotland Racing Ahead in Crowdfunding

Scotland Racing Ahead in Crowdfunding

The Scottish Crowdfunding Report 2016 was published this month and provides a fascinating update on the benchmarks established in the 2013 report and demonstrates Scotland’s rapid advance in UK crowdfunding.

Scottish Crowdfunding Reporttwintangibles was pleased to be commissioned to research and write both of these important reports on the specific and distinctive characteristics of crowdfunding in Scotland.

Significant progress has been made in the past three years from a position where we suggested that the low adoption rates of crowdfunding in Scotland  were perhaps a missed opportunity to a position where Scotland is outstripping the rest of the UK in its growth rates.

The report is focused on the use and impact of crowdfunding on business and has used a consistent approach across the two reports to ensure comparability. Drawing on crowdfunding activity data analysis, survey material and expensive interviews and focus groups the report highlights a number of key feature. Notably it demonstrates a significant the increase in the Scottish share of the value created from crowdfunding in the UK.  Scotland has jumped from a position of less than 1% of the UK total to 4% and this at a time when the UK crowdfunding sector has been growing at a remarkable rate. In the period the data was gathered Scotland raised some £27 million pounds through crowdfunding. The bulk of that, some £20 million, was raised through the Lending model. The dominance of the lending model is not a surprise and is in common with the rest of the UK but it is worth noting that in the Reward space Scotland commands around 7% of the UK totals raised.

Scottish Crowdfunding Report

Through the course of the three years the sector has matured significantly with both the size and nature of campaigns growing along with the range of sectors accessing these funds and the stage in a business life cycle where the funding is being sourced. For example we can see evidence of more mature businesses accessing crowdfunding, no longer is it considered simply for start-ups. A particularly interesting case included in the report highlights an investor exit using a crowd loan to finance the deal.

We suggested back in 2013 that it was not unreasonable to see Scotland’s share of the UK crowdfunding totals to reach around 8%. Some disagreed with this but the evidence seems to suggest that Scotland is getting there and we still stand by that aspiration.

The report was once again supported by the Glasgow Chamber of Commerce along with three new partners for this edition, those being Harper Macleod the law firm that has done so much to champion equity crowdfunding north of the border, LendingCrowd the Edinburgh based innovative crowdlending platform and Santander which as  one of teh major high street banks is demonstrating considerable engagement and openness to the crowdfunding sector, not least through their support of the report.

The full report is available for download free of charge in soft copy for the Glasgow Chamber of Commerce website.

Is the language we use in crowdfunding a problem?

The more we use old world capital market terminology the more we undersell, betray and erode crowdfunding and the more we mis set the expectations of new entrants.

When I hear about things like Lending Club working with Goldman Sachs to “Securitise” $150m worth of loans I begin to worry. When I hear of more and more institutional money flowing onto crowdfunding platforms I worry. When I see old world capital participants cynically creating “crowdfunding” platforms which are not crowdfunding at all I worry.

But in many ways I worry more when we casually and thoughtlessly fall into the use of old world capital terminology speaking of “investors”, “dragons” “yield”, “ROI” “exits” “valuations” “multiples” and all the rest to describe crowdfunding activity and participants.

And here is why.

Crowdfunding is different. Or at least it was. Crowdfunding was not just an extension of the existing capital markets and it was not invented to meet a gap in the existing market at a period of capital constraint post the 2007 crash. Crowdfunding, by virtue of its philosophical and practical traditions, emerged as a new and different model. A different model with new motivations and new participants, and new terms of engagement. Sure it provides money but it provides better money, money with more benefits, genius money as we choose to call it. It is genius because it comes under different terms and different expectations. The relationship and the contract is a different one. And on top of that it brings piles and piles of additional value. So crowdfunding has no need to look, describe itself or behave like old world capital. The more that it does the more it loses its soul and that is worse for all participants.

The language and preoccupations of old world capital have no place in crowdfunding.

To introduce them simply misleads the backers and supporters and mis sets their expectations and what to expect and why to engage and its storing up problems for the future. But perhaps more importantly by changing the nature of that relationship between backers and who they back, those getting the support are increasingly cheated out of all the benefits of having these different backers support them. They end up not getting the genius money just dumb old old world money.

This is one of my biggest bug bears with the FCA. They treat Crowdfunding as nothing other than a traditional “investment” and as such they create a culture, an expectation around the transaction which is inappropriate and, in so doing and as I have argued elsewhere, introduce greater risk to the sector rather than mitigating it. It is probably more “cock up” than conspiracy in the FCA’s case. With their “usual suspects” background they probably don’t know any better, but then again you rather get the impression that they don’t want to learn either.

Many platforms are also complicit in this as well. In part because, in the arms war to grow and secure their position (and often to pay back the old world capital backing them!), they have to conform to the requirements of the regulator and partly because they think this is how to attract in the “investors” and the institutional money they crave.

This will create a problem down the line for platforms as the financial and economic circumstances change and they find themselves competing with other traditional investments in a typical old style marketplace and find they have little to offer to differentiate themselves. So maybe short term gain may lead to long term pain.

It is noticeable that some of the major Reward platforms seem to be able to keep their conscience and souls somewhat more effectively. Kickstarter moved to becoming a Public Benefit Company and the words of founder Yancey Strickler still give cause for optimism. The recent interview with Danae Ringelmann of Indiegogo also holds out much hope of a new and better model will be sustained in the crowd economy.

But it seems that anything the wretched bankrupt sphere of old world capital touches corrupts – in that King Midas way that ultimately comes unstuck.

I found it fascinating speaking to a multiple successful crowdfunder recently who spoke of how he had experimented with Facebook Ads for a recent campaign and how he was abandoning them. For him straight ads created a different relationship. This was simply retail, ecommerce. The contacts coming through this route were just “purchasers” they were not in the for the journey. It is not for nothing that many platforms reinforce that they are not shops, and by the same token they are not banks or VCs either!

This is not a mere semantics exercise either. It cuts to the heart of what makes crowdfunding so different and so much part of a new crowdeconmy model which offers a new and better vision of how to do things.

So we must not be seduced by the siren calls of those that would simply see crowdfunding as an extension of what has gone before. We must guard against this by our use of language which can be very powerful, and I am as guilty of using loose terminology as anyone else. You, I and others needs to pay attention to this, it should mark us out as the uncorrupted.

So if your lending platform of choice begins to issue press releases about they “securitize” their loan book, or refer to you as an “arm chair dragon” I suggest that it is time to leave and take, or seek, your genius money elsewhere.

The Current State of Crowdfunding in Europe

We contributed to the freely available Current State of Crowdfunding in Europe Report. It coincides with a call for better standards of data sharing and an agreed taxonomy. We agree!

Cover Current State Crowdfunding EuropeThe report, which is free to download, was created by the CrowdfundingHub in Amsterdam and incorporated contributions from  some 30 collaborators of which twintangibles was proud and honoured to be one. Setting out a comprehensive overview of the state of crowdfunding in a range of different countries it is an impressive and valuable source of information and a testament to the growing importance of crowdfunding and alternative finance across a great deal of Europe and the wider world.

The report makes a number of overarching observations including the importance of a positive regulatory stance in the growth of crowdfunding and presents a  general upbeat and optimistic view of the possibilities of crowdfunding.

Another key observation is that of the need to create more a more defined  taxonomy for the sector and better standards of data sharing/reporting. I would wholeheartedly agree with both of these items. This has ever greater relevance as increasing numbers of old world finance operators ride on the coattails of crowdfunding to popularise new product offerings which have neither the  awareness nor the benefits of crowd finance. This is a problem as it distorts people’s understanding of the sector and, more importantly perhaps, deprives the users of the specific and distinctive benefits that crowdfunding brings. At the same time many platforms  exaggerate and distort their performance to position themselves more positively in an ever increasingly competitive marketplace and, in so doing, make the reporting of activity levels unclear and less than useful.  It is essential for consumers, researchers, administrators, regulators and indeed all participants in the market place,  to get access to a more coherent and comparable set of data based around shared standards in the interests of transparency, choice, measurement and practicality. Some kind of Dublin Core for data exchange and a manifesto for the crowd defining what is required for inclusion in the pantheon of crowdfunding, and the wider alternative finance sectors is a call we would echo and support.

What we would say in addition is that it cannot be left to vested interests or partisan actors to do this work as in such an immature market it would be unlikely to succeed! It might be that regulators might have a role to play in bringing this about but as few if any have any grasp of the subject matter they can’t operate alone and they must avoid being captured by lobby groups masquerading as sector representatives.

When is a Crowd not a Crowd?

I was speaking at an event recently, sharing the platform with an angel investor and discussing the relative merits of the many sources of funding and backing available to entrepreneurs. My position, as you might expect, was to set out the specific and unique benefits of crowdfunding as a source of funding. In describing the Long Tail model and the characteristics of the crowd as a source of insight and validation I wanted to convey how the crowd is the source of the additional value by virtue of its distinctive qualities.

But I failed.

I know that I failed as my Angel colleague, who spoke after me, went on to emphasise that Angel deals can have a large number of participants and are therefore “a form of crowdfunding”.

Well not all crowds are equal and so, sadly, my Angel was wrong and here is why.

Size matters in certain circumstances of course, but it not just a numbers game. The key aspect which makes the crowd so valuable is diversity. This encompasses a diversity of insight, expectation, motivation, location and pretty much any other characteristic you could imagine. This is the key.

A crowd of Angels is unlikely to bring that breadth. In terms of their expectation of return, the metrics of assessment, perception of risk, the perspective of the opportunity are likely to be relatively common. I would hesitate to accuse it of “group think” or clones but the truth is it isn’t a crowd in the sense that we use it in describing a crowd in crowdfunding.

In the same way many “crowdfunding” platforms are not really crowdfunding platforms, they just describe themselves that way for the opportunistic benefit of being associated with a relatively high profile topic. If the platform does not welcome and embrace the crowd in all that it does then it is not crowdfunding and the projects will not receive the full benefit available via crowdfunding.

Is this important? Yes it is. The promise of crowdfunding is not that it is just another source of the same old money. The promise of crowdfunding is that it is different money, better money, and that it comes with many additional benefits. As I explain in my forth coming book “Crowdfunding To Win”, and in the recently launched Udemy course of the same name, to really see the full benefit in crowdfunding, to truly win at it, it is important that you both understand these unique benefits and target them as appropriate as part of a campaigns targets and that the funding needs to be flexible, responsive and, in some cases, subordinate to those wider aims.


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