Crowdfunding Predictions for 2013

2012 was quite a year for the crowdfunding industry. In April, President Obama signed the JOBS Act into law, which will open up equity-based crowdfunding for unaccredited investors. In May, the Pebble E-Paper Watch set a crowdfunding record and gained national media headlines, raising over $10 million on donation-based crowdfunding site Kickstarter. Research firm Massolution estimates the crowdfunding industry (equity + donation + lending +reward crowdfunding) will grow from $1.5 billion in 2011 to $2.8 billion in 2012.

So if 2012 was the year that put “crowdfunding” into America’s collective lexicon, what will 2013 hold for the nascent industry? Here are three predictions for crowdfunding in 2013:

The implementation of the JOBS Act will not lead to an explosion in crowdfunding in 2013. Sorry.  Currently, a form of equity-based crowdfunding by accredited investors is permitted; what the JOBS Act will do once the SEC finalizes the rules, is to create a new way for unaccredited investors to participate in equity-based crowdfunding as well. However, I think many prognosticators will be in for a surprise when crowdfunding by non-accredited investors turns out to be much smaller than expected in 2013.

Why will it be smaller? 1) timing – rule implementation will take longer than everyone expects; 2) adjustment period- it will take time for all participants (companies, investors, lawyers, platforms, etc) to understand and adapt to the rules in an efficient way; 3) fewer (good) companies will care – raising capital for most companies is a challenge, but that doesn’t mean those that struggle today will want to comply with the many regulations and challenges equity crowdfunding for non-accredited investors will impose.  I have talked often in this column about adverse selection – and I worry the quality of the companies that chose to fundraise through the new crowdfunding rules, at least initially, will put a damper on the market as investors remain rightfully cautious.

Donation based crowdfunding sites will differentiate or die. While we are still in the very early innings of crowdfunding, Kickstarter has jumped out to a commanding lead among donation based crowdfunding portals. Since Kickstarter’s inception, campaigns on the site have successfully raised $371 million, and the distance between Kickstarter and the field keeps widening in the US (at least). While Kickstarter can be successful as the Amazon.com of crowdfunding, other donation sites will need to differentiate and own a particular niche to stay relevant, similar to what happened in the social media, flash sale site and countless other web industries.  Differentiation will mean improving upon the status quo for all of its users.

Angel Groups Will Embrace Equity Crowdfunding.  The facts are simple. Online platforms, including CircleUp, provide an improved company and investor experience. Why would you want to sit through 3-5 hour long meetings to see just a few pitches? You can ask questions and be a part of a community, while seeing relevant dealflow, by joining a respected equity-based crowdfunding platform. Angel groups will remain strong, as the best groups provide education, support and tools for members that go beyond just deal flow, but I expect more groups to seek out partnerships with top platforms to improve the experience for both sides.  One bonus prediction? Crowdfunding will again be a dominant topic at this April’s Angel Capital Association’s meeting inSan Francisco, as group manager and the Angels themselves find the best way to capitalize on the growing movement.  Platforms should embrace the conversation, and find a way to bring the best of what Angel groups do today along in this next generation of angel funding.

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