"The secret of change is to focus all of your energy, not on fighting the old, but on building the new." Dan Millman
Crowdfunding is often labeled as a new asset class. Generally speaking assets do represent value of ownership and asset classes are groups of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations. Well-known asset classes are equities, fixed-income, money market instruments, real estate and commodities. So in the strict sense crowdfunding is not a new asset class, but it facilitates the investment process via online platforms across many different established asset classes.
Crowdfunding is often labeled as a new asset class. Generally speaking assets do represent value of ownership and asset classes are groups of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations. Well-known asset classes are equities, fixed-income, money market instruments, real estate and commodities. So in the strict sense crowdfunding is not a new asset class, but it facilitates the investment process via online platforms across many different established asset classes.
One tends to believe that the facilitation of online transactions is well established in the financial services industry. The explosion of the internet in the mid 1990s and the adoption of e-commerce by financial institutions gave birth to online banking services as well as electronic stock trading. Even though e-commerce was considered a disruptive innovation and did significantly change many business procedures in the industry, it didn't question the existence of financial institutions as we know them. But that is precisely the disruptive potential crowdfunding has.
It begins with process efficiency
At the forefront of developments is peer-to-peer lending which is growing at an impressive rate due to attractive interest rates for borrowers/lenders. While it continues to pass major milestones, it is paving the way for the adoption of crowdfunding in other asset classes. Equity crowdfunding is already beginning to follow in its footsteps. Even though the volume is still marginal, compared to the size of traditional private equity markets, it is already beginning to disrupt the business model of angel investors and venture capitalists. Next in line for disruption is the real estate sector. Crowdfunding platforms enable real estate development companies to shift from time consuming and inefficient offline processes to online interaction with hundreds of investors presenting all the investment information digitally. What initially looks like an incremental improvement over the existing investment process, is in fact a dis-intermediation of the supply chain of capital allocation.
Threat to their business model
Another indicator of the disruptive nature of crowdfunding is the emergence of “Institutional Crowdfunding” which intends to match large and established companies with institutional investors. While transaction sizes are much larger, corporates and institutional investors benefit from the same crowdfunding qualities, such as total transparency and the ability to screen and analyse investment opportunities. Such corporate finance activity is typically the domain of investment banks but their involvement as an intermediary will eventually be no longer required. Such dis-intermediation is a common pattern across the entire asset class spectrum and it will be only a matter of time until investors are able to build a portfolio of holdings via crowdfunding in a format that rivals traditional investment funds. Intermediation, aggregation and risk diversification are the key functions of today's banking sector and capital markets but exactly those functions are ultimately challenged and replaced by crowdfunding platforms which will act as the new, democratised conduits of financial flows.
Emerging collaborative economic model
But the potential of crowdfunding is far bigger. It can turbocharge the resurgence of the co-operative model - a digital age co-operative - and it can enable the decentralisation of global corporate control which today is concentrated in few transnational financial institutions.[1] It can also be instrumental in a transition towards investing locally, recently termed 'locavesting' [2]. It is becoming more and more evident that investing in local communities supports small businesses that create jobs and form healthy and resilient communities. This developments goes hand in hand with the 'mutualisation' of knowledge via crowdsourcing and crowd-lancing for example. All these qualities of the 'crowd economy' represent a deep transformation of economic practices towards an emerging collaborative economic model. Such a model does not only provide a basis for the more efficient use of natural resources, but it also reduces the strain on the environment and provides for fairer wealth distribution. And that is big change for the better.
References:
[1] The Network of Global Corporate Control, Vitali, Glattfelder, Battiston, Chair of Systems Design, ETH Zurich (http://ethz.focproject.net/viewer/tnc)
[2] Amy Cortese, Locavesting, The Revolution in local investing
Photocredit: Juan Martinez: https://bit.ly/p/7Ek3rk
It begins with process efficiency
At the forefront of developments is peer-to-peer lending which is growing at an impressive rate due to attractive interest rates for borrowers/lenders. While it continues to pass major milestones, it is paving the way for the adoption of crowdfunding in other asset classes. Equity crowdfunding is already beginning to follow in its footsteps. Even though the volume is still marginal, compared to the size of traditional private equity markets, it is already beginning to disrupt the business model of angel investors and venture capitalists. Next in line for disruption is the real estate sector. Crowdfunding platforms enable real estate development companies to shift from time consuming and inefficient offline processes to online interaction with hundreds of investors presenting all the investment information digitally. What initially looks like an incremental improvement over the existing investment process, is in fact a dis-intermediation of the supply chain of capital allocation.
Threat to their business model
Another indicator of the disruptive nature of crowdfunding is the emergence of “Institutional Crowdfunding” which intends to match large and established companies with institutional investors. While transaction sizes are much larger, corporates and institutional investors benefit from the same crowdfunding qualities, such as total transparency and the ability to screen and analyse investment opportunities. Such corporate finance activity is typically the domain of investment banks but their involvement as an intermediary will eventually be no longer required. Such dis-intermediation is a common pattern across the entire asset class spectrum and it will be only a matter of time until investors are able to build a portfolio of holdings via crowdfunding in a format that rivals traditional investment funds. Intermediation, aggregation and risk diversification are the key functions of today's banking sector and capital markets but exactly those functions are ultimately challenged and replaced by crowdfunding platforms which will act as the new, democratised conduits of financial flows.
Emerging collaborative economic model
But the potential of crowdfunding is far bigger. It can turbocharge the resurgence of the co-operative model - a digital age co-operative - and it can enable the decentralisation of global corporate control which today is concentrated in few transnational financial institutions.[1] It can also be instrumental in a transition towards investing locally, recently termed 'locavesting' [2]. It is becoming more and more evident that investing in local communities supports small businesses that create jobs and form healthy and resilient communities. This developments goes hand in hand with the 'mutualisation' of knowledge via crowdsourcing and crowd-lancing for example. All these qualities of the 'crowd economy' represent a deep transformation of economic practices towards an emerging collaborative economic model. Such a model does not only provide a basis for the more efficient use of natural resources, but it also reduces the strain on the environment and provides for fairer wealth distribution. And that is big change for the better.
References:
[1] The Network of Global Corporate Control, Vitali, Glattfelder, Battiston, Chair of Systems Design, ETH Zurich (http://ethz.focproject.net/viewer/tnc)
[2] Amy Cortese, Locavesting, The Revolution in local investing
Photocredit: Juan Martinez: https://bit.ly/p/7Ek3rk
About the author - Rex Kempcke
Rex is an innovative banker with more than 15 years experience in retail banking, treasury and commodity trading at Commerzbank, J.P. Morgan and ABB Financial Services. Through his passion for entrepreneurship and new markets he got involved during the dot-com era in building up a business incubation unit for ABB, subsequently spinning off a company which pioneered the implementation of the European emissions trading scheme. He continued his career in the climate change sector first by joining EcoSecurties, a leading startup company in developing carbon reduction projects worldwide, and more recently as director in the environmental markets team of BNP Paribas.
Rex strongly believes that crowdfunding will cause a paradigm shift in the financial service industry and that it will make a significant contribution to the transition towards a sustainable economy.
Rex is an innovative banker with more than 15 years experience in retail banking, treasury and commodity trading at Commerzbank, J.P. Morgan and ABB Financial Services. Through his passion for entrepreneurship and new markets he got involved during the dot-com era in building up a business incubation unit for ABB, subsequently spinning off a company which pioneered the implementation of the European emissions trading scheme. He continued his career in the climate change sector first by joining EcoSecurties, a leading startup company in developing carbon reduction projects worldwide, and more recently as director in the environmental markets team of BNP Paribas.
Rex strongly believes that crowdfunding will cause a paradigm shift in the financial service industry and that it will make a significant contribution to the transition towards a sustainable economy.
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