Since the enactment of the Jumpstart Our Business Startups (JOBS) Act in 2012, there have been significant changes in the way businesses raise capital. This started happening in the US and has now expanded to Europe, Asia, and in other parts of the world. Currently, more startup capital is being raised through crowdfunding platforms than from traditional sources. If these trends continue then it is likely to be very difficult for the conventional financing corporates to survive in the industry.
Crowdfunding has largely disrupted the way businesses raise capital over the last two years. According to a report by Massolution, $16 billion was crowdfunded last year and about $34 billion is expected to be crowdfunded in 2015, when compared to the $30 billion usually raised annually through venture capitalists and $20 billion from angel investors. The World Bank expects the crowdfunding industry to be financing an average of $90 billion by the year 2020.
Crowdfunding is a technology-based innovation, therefore it cannot be ignored. People are using technology to make their lives easier and the same is being transferred to the way investments are made. For example, through crowdfunding people are able to diversify their real estate investment portfolios from the comfort of their homes or offices. They are able to explore different real estate investment deals, select the ones that are more appealing to them, send their contributions, track the progress of the investments and receive returns from anywhere.
The main functions of financial markets have been replaced by crowdfunding platforms. This involves raising funds for firms and finding lucrative investment deals for investors. Banks and brokers have been charging heavy fees to perform these same activities.
The venture-capital market has been largely challenged by crowdfunding, not only in raising capital but also in trading shares in that startups may also not require the services of stock markets. This is because they will prefer trading their shares, when the investment matures, through the same crowdfunding platforms they used to raise capital instead of stock markets that usually have numerous regulations and high costs.
Crowdfunding sites are the performing functions that were previously conducted by venture-capital firms and brokers in a much better and affordable way. If this trend continues, crowdfunding will truly disrupt traditional sources of financing and trading in the distant future.