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Crowdfunding’s massive growth still just tip of iceberg

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There are over 1,250 crowdfunding platforms worldwide. Approximately one million crowdfunding campaigns are launched annually. Over $20 billion in crowdfunding transactions will occur this year – a 100% increase over last year – according to Equitynet.

A World Bank report estimates that, by 2025, this number will spike to $300 billion annually, while others estimate as high as $500 billion, with up to $3.2 trillion in economic activity.

As impressive as they are, these numbers still do not quite tell the full story.

Entrpreneur.com reports how difficult it is for start-ups to get funding despite the proliferation of crowdfunding. Currently, 90% of the world’s online population has access to crowdfunding and $1,400 is raised in donations every minute. Still, only 3% of all start-up funding comes from crowdfunding. That is destined to change. Yet there are serious hurdles to overcome.

The latent demand for crowdfunding will multiply for the foreseeable future. While a million new crowdfunding campaigns annually seems like a massive number – and it is – consider this: There are 100 million new start-ups every year worldwide.

These numbers are staggering: 100 million start-ups every year launching over one million crowdfunding campaigns on over 1,250 separate crowdfunding platforms going after $20 billion in potential funding.

Start-ups are turning to crowdfunding because of the difficulty in gaining venture capital.

Less than one half of one percent of start-ups will ever receive VC funding. In 2014, a total of 7,474 venture capital financings were announced globally, with an aggregate value of $86.6 billion. Of that number, 5,272 companies in North America received VC funding totaling $59 billion dollars. And of these investments, only about 22%, or 1,160 start-ups, received early-stage seed funding. Do the math – VC funding is probably not the option to rely on for successful funding.

And yet, despite these discouraging numbers, just one in 100 start-ups is attempting to crowdfund.

A few years ago, most people didn’t know what the word crowdfunding meant. Now it is one of the three or four means of capital-generation considered by entrepreneurs when they are preparing to launch or expand. But the “mainstreaming” of crowdfunding has had unintended consequences – impacts that threaten the small- and medium-sized businesses and start-ups it was conceived to help.

E-commerce Times reports that Fortune 500 firms are actively experimenting with crowdfunding as a product launch and testing platform, potentially pushing out the small players. UC Berkeley is looking into providing courses for corporate executives wanting to launch crowdfunding campaigns. In addition, many charities, NGOs and scientific and health research projects are also looking to crowdfund their projects. This can be seen as an innovative, logical approach for all of these entities. But for the lean start-up, it means far more competition – much of it from corporate or non-profit sector behemoths.

Traditional crowdfunding platforms, and the industry as a whole, are becoming very crowded. With more and more competition, including consultants and corporate campaigns, the bar is getting higher for small businesses. The cost and effort to execute successful campaigns are becoming prohibitive for many small firms and entrepreneurs. This includes the cost of hiring consultants, videographers, graphic designers, marketers, bloggers, social media specialists and ecommerce experts. Large companies with deep pockets will be driving up the cost of these services, making it expensive for start-ups to afford. As crowdfunding platforms get bigger, start-ups are getting pushed out.

Breaking through the barriers is an uphill battle. The biggest advertising and marketing firms, scientists and consultants are taking over. The bigger the crowdfunding site, the less a small start-up can compete.

Crowdfunding was intended to enhance the start-up experience and bypass the onerous process of finding traditional investors to launch an idea or product. It was not intended as a marketing platform for established or already successful companies.

Of course, the marketplace determines events, and rightly so.

If big businesses see opportunities in crowdfunding, why wouldn’t they jump in?

Businesses, including ones that crowdfund, must adapt or die. Big businesses are adapting to the reality that crowdfunding can help them too – and that means that the little guys have to adapt to this reality as well.

As the biggest consumer companies in the world move into crowdfunding as a platform to market-test and pay for their product launches, the small businesses and start-ups that once relied on crowdfunding need to find a new model.

This series of blog posts introduces innovations that could revolutionize crowdfunding for the better.