Alternative Finance: Perspectives, Challenges & Recent Data on Crowdfunding & New Markets


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Presentation given by Dr Richard Swart, UC Berkeley @SV Crowdfunding Conference April 3, 2014.

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Alternative Finance: Perspectives, Challenges & Recent Data on Crowdfunding & New Markets

  1. 1. Alternative Finance: Perspectives, Challenges and Recent Data on Crowdfunding and New Markets Dr Richard Swart, UC Berkeley
  2. 2. Tweet Please •@richardswart
  3. 3. Who am I? • Run UC Berkeley’s Crowdfunding Research efforts • Strategic advisor/consultant • Independent researcher • Sample projects: • Job Creation and Economic Effects of Crowdfunding • Geographical, gender and racial effects in funding patterns • Strategic uses of crowdfunding and social finance for philanthropies and universities • Manifesto on Crowdfunding Policy • Market size estimates for Real Estate Crowdfunding • Analytical model for impact of crowdfunding effectiveness • Predictive model for crowdfunding’s effects in a given country • Quality indicators for determining investments in crowdfunding platforms
  4. 4. Big Announcements • Ewing and Marion Kauffman Foundation • Sloan Foundation • Milken Institute • Major projects in Middle East, Latin America and Europe
  5. 5. The 100,000 Foot View • Alternative Finance represents: • A growing and viable international market for institutional investments, allocation of capital in debt instruments, and relatively low risk equity transactions into microenterprises • A proven means of accelerating capital infusion into microenterprises resulting in job creation, increased revenues, and follow-on investment activity/loans
  6. 6. The 100,000 Foot View • A new channel for product validation, market testing, and customer engagement for brands • A possible disintermediation of charitable giving • A mechanism to activate communities of interest and increase long-term brand/cause engagement • Deal sourcing for Angel and VCs – rise of hybrid models • An organizing tool for Diaspora / Foreign Direct Investment into developing economies
  7. 7. Government and Policy • Second wave of equity crowdfunding coming internationally • US Congress has essentially lost political will to fix JOBS Act until change of administration and/or Senate • There will be changes to JOBS Act once administration changes • Capital flowing into alternative finance markets in part due to challenges of SEC delays and regulations • Governments see Equity Crowdfunding as an SME expansion strategy, less a startup discussion
  8. 8. Who Uses CF to fund enterprise? • 95% had some college education • 84% male • Nearly 50/50 self-employed and working • 35 years old • Average firm size is 2 employees • Largest “reported” firm size was 20 • Women set lower goals, but are more successful than men at reaching those goals
  9. 9. Some big numbers … • 15 Trillion / 450 Billion (Big Assets) • 4.56 Trillion (the 4s) • 81 Billion (Yuebao) • 51 Million (Eyeballs) • 86%/56% (Engagement)
  10. 10. Fraud (or lack thereof) • Empirical evidence does not support the argument that fraud will be a significant concern in crowdfunding markets • Mollick – 0.01% of KS show potential fraudulent intent • No reported fraud in equity crowdfunding markets despite hundreds of millions in transactions globally • But, Occulus and perceived relationships … • Fraud thrives on mechanisms of deception that are difficult if not impossible to maintain in open and transparent crowdfunding • We have seen emergence of FAKE crowdfunding sites in Africa
  11. 11. Viability • Over 90% of groups raising more than $5,000 in successful CF projects turned into viable ongoing ventures • Greater than 70% of ASSOB backed firms still in business after 5 years • Evidence suggests CF associated with selection of more viable firms – challenges 70% failure rate
  12. 12. Some takeaways • Alternative finance markets for consumers are slow growing • Online consumer finance poorly understood but rapidly threatening banking models • Institutions have figured out efficiencies in social finance mechanisms – challenges are underwriting and retail recruitment • Silicon Valley is the Crowdfunding Bank
  13. 13. Flows • Initial (not yet published) data shows: • Money flow from heartland to coasts • Money flow from Silicon Valley to LA • Users are late 30s, college educated, urban, technology savvy • Nearly no penetration of minority communities
  14. 14. Challenges • Banks: Leverage P2P and P2B, use CRA for reaching minorities, reposition your loan products downstream from crowdfunding • Institutions: Lack of industry experience resulting in analysis challenges, risks: • Platforms misstating earnings • Platforms undercapitalized • Some management teams are light weight • Some platform technology can’t scale
  15. 15. Challenges • Universities/Philanthropies • Most universities don’t have a clue, yet between 60-90 will launch CF initiatives this year • Donor disintermediation • Alignment with CSR and corporate programs • Donors and Investors do not see Crowdfunding as time limited … they are participating in creation in a community. So how do you create ongoing value?
  16. 16. Questions … • • @richardswart