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Opinion

Winning Over the Crowd(funding)

November 24, 2014
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3min read

Since the Jumpstart Our Business Startups (JOBS) Act was passed in 2012, investors are interested to know how well the crowdfunding markets have performed. The potential for crowdfunding to act as a competitive alternative asset class has many investors and institutions scrambling to not only establish benchmarks for performance but also to aid valuation and to lower the cost of compliance and raising capital.

A report released in January 2014 from Crowdfund Capital Advisors (CCA) detailed the responses of hundreds of organizations that ran a successful crowdfunding campaign in several regions around the globe to find out if crowdfunding indeed produces a positive economic impact.

"AN OVERALL POSITIVE ECONOMIC IMPACT"

The report, sponsored by Ellenoff, Grossmann and Schole LLP, showcases the New York-based legal firm's landmark involvement in the growth of the crowdfunding market. It also answers key questions about the viability of the returns generated by the sector, and provides guidance for the future. 

 According to the report, crowdfunding campaigns conducted by a company increased  quarterly sales by 24% on average, but equity-based crowdfunding campaigns reported an average increase of 341% in quarterly sales.Crowdfunding also provides a compliant environment that allows smaller companies to access capital from investors.  It not only provides opportunity for organizations that are seeking to raise capital, but also for ancillary businesses such as legal firms and crowdfunding portals to come into existence. One of the goals of the JOBS Act and the crowdfunding market was to ease the burdens that companies face raising capital; on average, it currently costs $39,000 to raise $100,000 worth of capital.  Many proponents believe that portals provide a "minor league" capital-raising structure that can ultimately lead to the publicly-traded markets in a compliant way - friendly to the principles of both regulatory and investor-relations bodies.

Crowdfunding also opens doors to additional rounds of financing, since these structures provide investor confidence in the markets involved.  Within three months of a successful crowdfunding campaign, 28% of companies surveyed completed additional rounds of financing with angel or venture capital investors.

A significant takeaway was the interest of institutional investors looking at crowdfunding as a burgeoning alternative investment class; 43% of respondents reported that they were in talks with institutional investors for additional rounds of financing.

BUT WHERE ARE THE JOBS?

Critics allege that one of the negative takeaways has been the relatively tepid job growth numbers created by the crowdfunding market.  The report mentioned that on average, 2.2 jobs were created as a result of the activity from crowdfunding campaigns, somewhat lower than initial projections showed during the infant phases of the market.

But more than that, critics allege that some of the provisions of the JOBS Act may be slow in coming to fruition due to the lack of urgency among regulators. Indeed, there is somewhat of a disconnect between regulators identifying key problem areas and taking the appropriate measures in response.

But the comparative lack of job creation can be attributed to the nature of crowdfunded organizations themselves; most crowdfunded organizations can be defined as smaller startup companies with hardly a fraction of the resources that larger publicly traded corporations enjoy.

WINNING THE CROWD

With investors and portfolio managers alike searching for better returns, it comes as no surprise that crowdfunding generates the buzz that it does.  However, the sector must undergo consolidation and soul-searching in order to define the next step in the evolution of the industry.  On the television program "Shark Tank", QVC guru Lori Greiner said that the crowdfunding market is "too crowded" - with the proliferation of too many platforms, people and plans, this assessment is not inaccurate.

But it does show that all the players involved are aware of the potential of what working the crowd can do. With every hour of a crowdfunding campaign generating over $800 in economic activity, it is a mutually rewarding experience for everyone involved.

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