Crowdfunding provides many interesting opportunities for the world of small business finance. It’s an exciting and relatively young investment format – and that’s both its chief advantage and its chief problem.
The language of the industry is still evolving, but the term ‘crowdfunding’ can be applied to online marketplaces for equity, P2P debt, rewards and other forms of online capital raising.
This young and exciting alternative has raised over $50bn in capital for nearly six million individuals and businesses. Today, there are an estimated 5000 global marketplaces (and growing), of which some 1700 specialise in SME finance. However, that it’s young also means that it’s largely unproven in the eyes of potential investors.
This is a hurdle that could be overcome with greater information disclosure. Information obscurity is currently common and therefore makes an investment proposition more difficult to assess and compare for investors – many of whom may be less able weather losses than their counterparts in private equity or venture capital.
To promote marketplaces as a reputable channel for raising and deploying capital, and to improve their collective long-term prospects, all ecosystem stakeholders must work together to foster the accessibility and transparency of information. Here’s why.
Why data sharing matters
Beyond all – very valid – commercial, operational, and investment-related concerns, data transparency matters because it is an area of heightened regulatory scrutiny. Crowdfunding platforms will soon be subject to FCA rules mandating that they release sufficient loan information to investors. One way or another, data transparency will gather pace.
Sharing data on the investment opportunities and their performance is in the interests of the whole industry. When accurate, high-quality, and up-to-date information is available, the market is better placed to earn trust, scale-up, build an ecosystem of supporting services and – most importantly – hope to avoid the mistakes of the past.
This move towards transparency comes against a backdrop of conventional avenues of investment being viewed with more suspicion than ever: a survey revealed that 55% of investors trust the traditional financial services industry less than they did before. Innovative online marketplaces therefore have an opportunity to gain a level of trust that conventional investment institutions lack. Both the platforms and those using them can earn this trust by reliably releasing high-quality data and thus sharing their position honestly.
Beyond trust, those who share their data could be better placed to benefit from key market innovations. Robo-advisory services, for example, are designed to create the best possible user experience with the minimum possible amount of human input – automating the selection of good investments. But they can’t recommend an investment if they don’t have sufficient history or information to draw on.
The future of crowd fundraising
Data transparency is essential for the health of the whole marketplace or crowdfunding ecosystem. The more information companies share, the more likely investors and raisers alike are to build trust and therefore enable the industry to scale up and mature, and become the new norm. Here’s to a data rich, transparent future.
By Emily Mackay, CEO, TAB