Gone Too Soon? Why Crowdfunding Could Die Within the Next Decade

Business.com / Funding / Last Modified: February 22, 2017

Crowdfunding is beneficial for visionaries and average Joes alike. But with a few glaring issues, it could be gone in the next decade.

Crowdfunding has been a godsend for countless hopeful entrepreneurs, visionaries and average Joes who just need a little extra money to make their dreams a reality.

Over the past five years or so, crowdfunding has evolved to become a go-to for practically anyone in need of additional capital, allowing people to bypass the typical constraints of borrowing from financial institutions, taking investments from venture capitalists or using traditional fundraising techniques.

There are many key advantages to crowdfunding that have allowed it to explode in popularity. First, it’s a way of consolidating the fundraising process—rather than hunting down individuals who might like to donate substantial sums of money, fundraisers can appeal to millions at once for smaller amounts. Second, it functions as a social platform, making it easier for ideas to spread. Finally, it’s been appealing to the consumer, allowing anyone with an Internet connection to give any amount to causes they deem to be worthy.

Unfortunately, these advantages cannot make up for a handful of critical weaknesses in the nature of crowdfunding—at least, crowdfunding as we know it today.

While the crowdfunding scene is still healthy and thriving in the moment, there are certain cracks starting to emerge that could cause the entire industry to collapse or force it to evolve. In fact, there are three main threats that the crowdfunding space is facing, and if it wants to survive, it needs to address them immediately:

Related Article: Does Crowdfunding for Startups Actually Work?

1. Selective Interests and Biases

Recently, crowdfunding has been the target of individuals with a biased political agenda. For example, the Sweet Cakes bakery in Oregon was fined $135,000 for discriminating against a lesbian couple, and it turned to GoFundMe for financial help.

GoFundMe promptly removed the campaign, citing a violation of the site’s terms of service, but this isn’t an isolated incident. Many campaigns with discriminatory or controversial intentions have been flagged and removed.

These types of campaigns pose a few different problems for crowdfunding platforms.

First, negative publicity. Even though GoFundMe is not affiliated directly with the individual campaigns hosted on its platform, it could get a negative reputation by proxy.

Second, these types of politically motivated campaigns are natural magnets for lawsuits, and that means more controversy and legal trouble for crowdfunding platforms, which could ultimately leave them in ruins.

2. Legal Ambiguity

Investments in stocks, bonds and other vehicles are heavily and strictly regulated by the government. Crowdfunding is a type of investment, though at a smaller and broader scale, yet it isn’t subject to nearly as many regulations as its bigger-picture counterparts.

Some platforms refuse to release any funds until a certain goal is met. Few offer any serious legal protection for either investors or fundraisers. The legal precedent for crowdfunding has been shaky, at best, since its inception.

Eventually, lawmakers will get around to taking action, leading to two possible outcomes, neither of which will be pleasant for the crowdfunding industry as a whole.

The first is that new laws are placed, harshly regulating the industry and forcing many platforms to close their doors entirely. The second is that the ambiguity continues, and eventually a swarm of litigation starts putting additional pressure on platforms to make meaningful reforms, possibly leaving them in financial distress.

Related Article: No Thanks, Banks: Alternatives to Small Business Loans

3. Oversaturation

Most of the problems with selective interests and ambiguous laws can be solved with a counteraction—the development of rules designed to protect crowdfunding platforms from these threats. But there’s a much bigger, more destructive threat that’s already beginning to eat away at crowdfunding platforms’ potential: oversaturation.

Already, there are multiple crowdfunding platforms designed for different audiences, different intentions and different types of projects—Kickstarter and GoFundMe get all the attention, but these platforms are increasing in number and diversity at an alarming rate.

Appropriately, a greater number of fundraisers are emerging to try and get a piece of the pie, but funders have a limited amount of capital to part with. This oversaturation problem will increase to a tipping point, when only a small fraction of all fundraisers ever gain momentum and potential funders are fatigued from seeing so many potential projects.

Eventually, both funders and fundraisers may lose interest in the platform entirely.

Crowdfunding isn’t in any immediate danger, as many entrepreneurs who recently met their goals on one of these platforms can tell you. Hundreds of people start new campaigns every day, and users are still excited to donate to worthy causes.

However, over the course of the next 10 years or so, the extraneous factors putting a burden on crowdfunding will eventually begin to weigh it down.

There is a small chance that crowdfunding itself could disappear entirely—but at this point, that seems unlikely. It’s more likely that crowdfunding will be forced to evolve into a more sustainable, more balanced model with more rules, more regulations and a stricter point of entry.

While these excessive regulations will inevitably destroy some of the qualities that made crowdfunding so appealing in the first place, they will allow crowdfunding to flourish in a much more stable environment, and hopefully, for a much longer period of time.

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