Liz Gannes

Recent Posts by Liz Gannes

Widely Cited Crowdfunding Market Estimates Are Probably Too Optimistic

Online crowdfunding, where regular folks shell out money to back a project or a company in return for rewards and sometimes equity, is pretty hot right now.

And it’s set to get hotter when the U.S. JOBS Act goes into practice, which will make equity funding broadly available to unaccredited investors.

But let’s not get ahead of ourselves. Felix Salmon at Reuters has a well-executed takedown of a widely cited global estimate for crowdfunding, which had pegged the market at $1.5 billion in 2011, with the potential for $2.8 $3.2 billion this year.

This came from Massolution and, an industry organization focused on crowdfunding.

Salmon parsed the Massolution report to find that it includes all sorts of things many people wouldn’t call crowdfunding — such as online charitable donations. The calculation also includes a generous more-than-doubling to allow for crowdfunding platforms that Massolution hasn’t accounted for directly.

It turns out that the sliver of that massive $1.5 billion that can be attributed to crowdfunding for rewards and equity — you know, Kickstarter and Indiegogo and the like — is just $165 million.

Rory Eakin, COO of early equity-based crowdfunding platform CircleUp, said he agrees that the Massolution estimate was overeager.

“We believe the market will develop more slowly than is projected by Massolution, and that is a good thing,” Eakin said in an email. “Investors are still learning about this novel form of financing, and companies need to be carefully screened to determine their investment worthiness.”

Update: Massolution CEO Carl Esposti wrote to contest some elements of Salmon’s critique, which I had extended here. He said the amount that can be directly attributed to reward- and equity-based crowdfunding is $174 million (basically, quibbling with Salmon’s math), but that number does not include platforms that did not respond to a Massolution survey, such as Kickstarter.

For instance, Kickstarter had separately self-reported $100 million in crowdfunding in 2011, which Massolution added into its total estimate. Esposti said other self-reported totals, rather than extrapolation on his firm’s part, added up to the majority of the total $1.5 billion estimate.

Ultimately — and this is where he and Salmon agree — Esposti said he takes a broader view of what counts as crowdfunding than some people may.

Crowdfunding, as Massolution defines it, is “a model for raising funds where lots of people come together to put money into a project, intermediated by a funding portal via the web.”

“The industry has reached a consensus that four models of crowdfunding exist: reward, donation, lending and equity-based, that are distinctive based on the participants’ motivation for using each model,” Esposti said.

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik