Trends in Alternative Financing

Illustration by Tim Bradford

Alternative financing is shaking up the entire financial sector. Gone are the days when individuals and businesses had no choice but to work with banks to get the financial services that they need. Now there are all kinds of different options such as peer to peer lending and crowdfunding too. In fact, as Nesta (2015) reports:

“In 2014 alone, P2P lending and crowdfunding platforms delivered more than £1.7 billion in finance to UK SMEs and individuals… we project it to more than double in 2015.”

Nesta has reviewed the full scope of the alternative finance industry and has developed a summary of major trends that are taking place. Some of these follow.

Traditional Investors Work With Smaller Funders

One particularly interesting trend is that large traditional investors have started working with smaller funders. Examples can be seen of banks and venture capitalists engaging with crowdfunding and P2P lending platforms, among others. What is happening is that large traditional investors are using crowd financing sites to invest capital. As equity-based crowdfunding platforms have grown hugely they have started to pique the interest of traditional investors. Indeed, a study by Nesta in 2014 found that 38% of respondents self-reported that they were high net worth individuals or sophisticated investors that use equity-based crowdfunding sites. There has also been involvement of large players in the P2P markets.

Another big trend is that crowdfunding is starting to be used to raise funds for carrying out public projects. This benefits communities as more investment can be made into public projects. One example of this is where citizens pick out the types of projects they want funding for and then try to raise the total money needed from crowdfunding platforms, such as Spacehive (UK based) which allows public projects to raise money from the crowd. While this all seems well and good on the face of it, looking deeper there are some challenges, such as the fact that those adept with crowdfunding and how it works may also be those that have more power and can make sure that certain projects are more likely to get funded by putting their weight behind those.

Crowdfunding plus crowdsourcing

Yet another trend that has been emerging has been crowdfunding combining with crowdsourcing to achieve goals. For example, a project might seek money, but then might also look for non-financial input, such as time, skills and objects. Some platforms have looked at making ways for financial backers to provide this type of support too, and the Spanish platform Goteo allows for this option. It is thought that in the future people may be more interested in the non-financial benefits than the financial ones possible through these platforms. Meanwhile another trend that has been emerging with crowdfunding in particular is that Bitcoin and other cryptocurrencies have been providing chances to offer cost savings in crowd funding or for investors to hold smaller shares of companies.

Becoming an Investment Manager

One very empowering trend that has been underway is that anyone can now become an investment manager. All kinds of platforms have been developed that let people play a greater part in how their money is managed and specifically what they invest in. Some platforms provide the opportunity for people to provide alternative finance, such as in renewables, for example. Other important features of this trend are the fact that people can directly invest, they can invest in smaller amounts and also, they can invest in a wider array of investment opportunities. Platforms also provide a level of education that helps this process in some cases.

Crowdfunding and P2P Lending in Developing Economies

In developing economies it is thought that crowdfunding and P2P lending will become an integral part of new financial systems. This is a trend that provides tremendous opportunities for people that are unbanked, and allows them to borrow money, invest or save. Mobile money transfer through services such as M-Pesa are seen to be forerunners of this trend, and this has led to an increase in P2P and crowdfunding in developing countries.

New jobs: The Crowdfunding Consultant

New opportunities have been emerging for roles for savvy individuals as a part of the alternative finance revolution. One is the emergence of the Crowdfunding Consultant. These people capitalise on the fact that it can be difficult to raise money on crowdfunding sites. Nesta carried out a search on Google for crowdfunding consultant and found 13,000 results, indicating the size of this trend.

Increased Competition between various crowdfunding sites

A final trend outlined by Nesta is the increased competition that can be found between global, local and niche crowdfunding sites. The industry is still fairly new after all, and it is yet to be seen which sites and platforms will emerge victorious in different regions, and indeed globally. Kickstarter and Indiegogo have already done very well globally, but local sites and niche sites have also been performing well in some cases.