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

Dr Richard Swart, UC Berkeley

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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

Big Announcements• Ewing and Marion Kauffman Foundation• Sloan Foundation• Milken Institute• Major projects in Middle East, Latin America and Europe

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

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

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

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

Some big numbers … • 15 Trillion / 450 Billion (Big Assets)

• 4.56 Trillion (the 4s)

• 81 Billion (Yuebao)

• 51 Million (Eyeballs)

• 86%/56% (Engagement)

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

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

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

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

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

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?

Questions … • rswart@berkeley.edu

• @richardswart