A look inside the future of crowdfunding

Not so long ago crowdfunding seemed like a niche concern, but the popularity of Kickstarter and its contemporaries has since propelled the finance model fully into the business mainstream. As more companies and investors embrace it, what will the future hold?

When design and lifestyle start-up Fashion Entertainment had a brainwave to launch an amazing new style of wristwatch in 2015, crowdfunding seemed just the right fit. After all, its e-paper watch [below] was a bold and exciting enough product to get techheads on board in droves, and as a new business it could certainly use the cash injection.

What followed was a familiar success story, with the FES watch raising over $20,000 via Japanese crowdfund site Makuake to bring the watch to market. But there was one crucial twist in the tale - Fashion Entertainment was actually a subsidiary of Sony. In an effort to boost profitability and push innovation, the electronics giant had harnessed crowdfunding as a fresh way to bring its employees' own projects to life.

In 2016 they repeated the trick with the watch's second iteration. Crowdfunding, it would seem, wasn't just for the little guys any more.

From home projects to pro finance

While we often associate crowdfunding with powering individual projects - from saving local cinemas to financing a cult video game sequel - an altogether more corporate view of the medium has emerged in recent years.

"There's been a shift towards larger corporate organisations and venture capitalists getting involved in bigger scale crowdfunding operations, which is quite interesting," says Guy Shone, founder of explainthemarket.com.

"It's become a bigger platform for business than people perhaps realise. It's moving away from this local, democratised starting point, and is now positioned more under the corporate leadership banner in some instances."

On several fronts, crowdfunding has suited up and sharpened its business teeth. In recent years, an increasing number of large corporates have seen it as an attractive way to complement their own investment in big-scale campaigns, bringing in extra money while also operating as a marketing tool to boost customer engagement.

It's arguably a far cry from the model's original grass-roots spirit, but is nonetheless a trend most commentators believe will continue.

Equity for all?

The shift towards business is also expressed by equity crowdfunding - another major trend with ramifications for the model's future.

In equity crowdfunding, backers help to finance start-ups and their products by buying shares in the company in question. This approach can effectively turn a backer into an investor with a lasting connection to the company - and in the process, opens up a fascinating range of possibilities.

First, let's consider the obvious positive: By taking a bold, alternative approach to engage a group of multiple investors, new start-ups can spread their wings and use the newfound capital to take off. The entry level to invest in a business drops, money is raised and new ventures launch - it really does seem like a win-win.

However, as with so many disruptive concepts, it also redefines our conventional understanding of customer/owner boundaries - and growing pains abound.

As equity crowdfunding creates a new class of investors, there's a risk that many of the people drawn to supporting a start up won't have the knowledge or inclination to play a truly positive role beyond their donation.

"Traditionally, selling private equity is often about bringing in expertise and a wider network - it's a scenario you hear a lot on Dragon's Den," Guy Shone explains. "There's a lot of sense in that, and will a start-up get the same effect by relying on 2,500 people it doesn't know?"

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Identity crisis

The role of the backer in equity crowdfunding is also transformed. Rather than their pay-off being the project itself and any rewards attached to it, crowdfunding can now be seen as a tool for venture capitalists to get a lasting ROI.

Of course, there's nothing wrong with this. For businesses big and small, the range for crowdfunding is expanding, and more opportunities are opening up as a result.

However, as Guy points out, it does leave the larger crowdfunding sites like Kickstarter with something of an identity crisis.

"There's a challenge for the big crowdfunding sites in particular to figure out who they're appealing to over the next five or 10 years," he argues.

Read: Seven things every crowdfunder needs to know

"Are they appealing to big, institutional investors, offering a complementary range of services to their existing portfolios, or are they appealing to you and I, who might want to help get a fantastic project off the ground in support of our local library?

"Right now they're trying to retain the spirit of one while bringing in the money of the other - that's a challenging place to be strategically."

Every crowd has a silver lining

Of course, there's no lack of space on the internet, and in all likelihood the future of crowdfunding will see both versions continue to flourish.

As the marketplace grows even bigger, we're likely to see the split between platforms for big businesses and those for smaller-scale projects become more pronounced. Already, crowdfunding sites like CrowdCube know exactly who their audience is, articulating a clear offering for business fundraising and investing.

Indeed, some commentators predict crowdfunding will become increasingly atomised, with niche platforms catering to specific areas of interest like documentaries, board games, maternity leave and more.

Whether crowdfunding can inspire the masses to try their hand at equity investment in the same way Airbnb has unlocked the property lettings market remains to be seen. But one thing's for certain - whichever direction the model heads in next, the crowd is only going to get bigger.

This is a guest blog and may not represent the views of Virgin.com. Please see virgin.com/terms for more details. Thumbnail from gettyimages.

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