LSE Entrepreneurship’s second poll asks about the future of crowdfunding – is it a temporary trend or here to stay?

According to Nesta’s 2014 Understanding Alternative Finance Report, equity crowdfunding in the UK grew by 410% between 2012 and 2014 and raised a total of £84 million. In the US in 2013 $203 million was raised. Is equity crowdfunding on its way to becoming a significant source of finance for entrepreneurs?

Crowdfunding: a brief history

Crowdfunding is a broad term for the request of funding from many individuals through an online platform. In practice it can take many different forms, including peer-to-peer lending, peer-to-business lending, rewards and donation-based crowdfunding and, our main topic, equity crowdfunding.

While crowdfunding has been around in various forms for a long time (in the eighteenth century Alexander Pope used it to fund his translation of the Illiad according to this Kickstarter blog post), its current incarnation grew from collaborations in the 1990s between online communities. The first online crowdfunding project is said to have taken place in 1997, when the rock band Marillon raised $60,000 from its fans to fund its tour.

From 2000, a growing number of crowdfunding platforms were established, such as Zopa in the UK and Prosper in the USA, which enable micro-lending as well as peer-to-peer lending. Later on in the decade online crowdfunding gathered pace as sites like Indigogo (2007) and Kickstarter (2009) were set up, offering rewards-based or donation-based crowdfunding. It was only in 2011 that the first equity crowdfunding platform, Crowdcube, was launched, followed shortly after by Seedrs in 2012.

A 2013 World Bank report found that at least 45 nations now have active crowdfunding platforms, and in the UK alone last year £1.74 billion was raised by crowdfunding This year, Lending Club, a peer-to-peer lending company, is expected to be priced in excess of US $5 billion when it IPOs.

The only way is up?

Is crowdfunding a fad?

Nesta’s Understanding Alternative Finance Report shows that equity crowdfunding is on a steep upward trajectory, but £84 million is still only a small portion of the money raised by new businesses across the UK. Private means, venture capital, angel investors (who invest around £850 million per year in new businesses) and government grants account for far larger sums. The same Nesta report also found that peer-to-business lending, another alternative and ‘democratic’ finance source, raised £749 million, far more than equity crowdfunding (though admittedly its growth rate was less: a mere 250%).

Equity crowdfunding faces a lot of challenges, not least the regulatory ones that our guest blogger Mary Fox highlighted in her recent post, Protecting the Future of Equity Crowdfunding. And, like all new industries, particularly those based on disruptive technology, its future is very difficult to predict.

So what do you think? Will equity crowdfunding transform the way businesses are financed in the future, or is it a temporary trend? Vote now in our new poll: is crowdfunding a fad?

Sara Feast is Communications and Events Officer at LSE Entrepreneurship.