During recessions, banks and institutional investors, once eager to take on smaller projects and riskier ventures, tighten their lending standards and slow down investment outflows. The government can counteract these trends with loan programs and credit enhancements. But, during a recession, these dollars dry-up quickly, leaving businesses reeling.
Even under these conditions, recessions can catalyze innovation. During the first year of the 2009 recession, more than 550,000 new businesses launched. Instead of relying on traditional capital, these entrepreneurs turned towards the crowdfunding marketplace to receive capital at a magnitude otherwise unseen. What first started as donations from friends and family members to struggling small businesses on sites like KickStarter and IndieGoGo, became a critical way for entrepreneurs to build capital and prototype new products, like the pebble watch or the Plus Pool.
With early success, the crowdfunding market grew 54% between 2010 and 2011, grossing more than $830 million dollars among 1.2 million crowdfunding campaigns. Since then, the growth of the crowdfunding market has dwarfed these numbers. Crowdfunding’s success quickly moved beyond donation campaigns. Platforms like the Lending Club and Prosper democratized the lending and investment process, allowing almost anyone to put their dollars towards new ventures and growing businesses.
Donation, reward, debt, and equity crowdfunding models have provided a range of options for crowdfunders. At one end of the spectrum, donation crowdfunding offers low risk options for novice investors. At the other end of the spectrum, equity crowdfunding can offer a financial return on investments for those willing to risk more.
As the recession continued to impact bottom lines, Congress shepherded the Jumpstart Our Businesses (JOBS) Act, giving credence and introducing regulations for the crowdfunding market. In the years to follow, hundreds of crowdfunding platforms got their foothold, diversifying their position in the market in terms of model and offerings. In the following years, the US Securities and Exchange Commission set forth rulings that would protect investors in the crowdfunding market. Whereas access to investments used to be reserved for banks and institutional investors, crowdfunding opened these options to a wider pool of money. In doing so, entrepreneurs and capital seekers, sought more than just capital. They were able to quantify the demand and approval for their products and services.
In 2019, business journals started to see the writing on the wall- we were heading toward an impending recession, one that would bring a decade’s bullish market to a slow down. But, no one predicted the rearing economic halt of Covid-19. Similar to the 2009 recession, government programs have stopped short of supporting these businesses and providing a safety net for critical economic programs. Crowdfunding, after years of growth and ongoing regulatory clarity, is well positioned to fill the gap for small businesses, emerging businesses, and cash-strapped local governments.
Investors are looking beyond the turbulent economic conditions of Covid, and the impending recession, to diversify their portfolios and associated returns. They recognize the tumultuous state of the stock market and are looking for alternative places to put their dollars. And, entrepreneurs and small businesses are flocking to the crowdfunding market, eager to find alternative capital sources. These two sides are meeting on crowdfunding platforms. Just as the 2009 recession created the perfect environment for this to occur, we are seeing the stage set for crowdfunding’s second rise. As the SEC relaxes regulations, crowdfunding platforms are in a tight position to ensure they support and vet new opportunities while informing potential investors, all in the hopes of maintaining confidence.
At the center of this tension, the Financial Regulatory Authority (FINRA) is providing more confidence by regulating funding portals. By registering with the SEC and joining FINRA, crowdfunding portals self-select into a community of platforms that keep investors at the forefront of their operations. InfraShares is just one of these platforms, offering individual investors opportunities to diversify their portfolio while also supporting specific companies and projects they believe in. This self-directed impact investing, can provide investors social return alongside financial returns. Through a growing community of individual investors, InfraShares is building a space for like-minded businesses and investors to prosper outside of conventional capital markets.