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Investing to Belong: Equity Crowdfunding and Return on Investment
© Image: Flickr.com / Beaufort's TheDigitel
editorial

Investing to Belong: Equity Crowdfunding and Return on Investment

Editor's Note: The following comes to us from David Dupee, founder of crowdfunding platform CraftFund. Dupee writes in to explore the psychology that drives crowfunding, specifically examining millennials' investing behavior. Follow the platform's progress on Twitter @CraftFund.

The JOBS Act has been hailed as an opportunity for the average investor to invest in the next Facebook and yield the kind of financial returns once only available to angel and accredited investors.

Based on reports, the SEC’s delay in finalizing regulations is due to investor protection issues and concerns of fraud, a concern which is largely premised on the assumption that investors are primarily motivated by a financial return. While financial returns will certainly motivate equity crowdfunding, I believe that equity crowdfunding will be driven just as much by a desire to engage and belong. There are two reasons for this:

Small investment amounts

First, the prospect of significant financial returns are tempered by the strict investment caps Congress wrote into the JOBS Act that will limit most Americans to between $2000-$5000 in crowdfund investments per year. Most returns on this kind of investment will be modest, which suggests that many won’t choose to invest simply to become rich.

Those with higher net worth (“accredited investors”) will be able to invest much larger amounts and could be enticed primarily by significant returns, but this is a very small percentage of total investors and a group that already can make these investments.

Millennial behavior

Second, as the most active group on current crowdfunding platforms like Kickstarter and Indiegogo, tech savvy millennials are expected to be the key demographic for equity crowdfunding. Millennials approach investments differently than older generations. It is well documented that mutual funds and other traditional investment models have struggled to attract the millennial group that seems to favor more customized and participatory options. For this reason, millennials will be more likely to view equity crowdfunding as an experience as much as an investment.

BrewDog Illustration

Scottish brewery BrewDog perfectly illustrates how equity crowdfunding is motivated by both a financial return and a desire to belong. Needing money to finance expansion, BrewDog recently turned to craft beer lovers, a crowd heavily populated by millennials.

Termed “Equity for Punks”, BrewDog sold two rounds of shares to the public through an online mechanism. In the second round the brewery offered 90,000 B shares to the general public with a minimum investment of 4 shares for £95. The campaign was an incredible success and sold out within 6 months, raising over £2 million from nearly 6000 investors. In return for the investment, BrewDog offered a financial return as one component of a broader membership experience that included the following:

  • Lifetime 5% discount in all BrewDog bars
  • 10% discount on beers and merchandise from their website
  • First options on special and limited edition BrewDog beers
  • Entry into the 'AGM' (shareholders meeting and event)
  • The thrill of owning part of BrewDog (albeit a very, very small part)
  • Your very own BrewDog I.D.
  • Potential financial return but not for the next two years as no dividend will be paid until at least 2013

The average investor invested more (£372) than the minimum £95 investment amount, suggesting membership in the community was not the sole motivating factor and that investors were at least in part motivated by the prospect of a financial return.

However, it is striking that most of the perks offered were experiential and psychological in nature. Indeed, in its recent article on crowdfunding, the Harvard Business Review studied BrewDog’s campaign and concluded that the excitement it generated “was as much about belonging somewhere as it was about money.”

Conclusion

BrewDog’s “Equity for Punks” campaign provides helpful insight into the psychology of equity crowdfunding. Here in the U.S., there are over 2000 breweries and many other small businesses in desperate need of an alternative source of capital to help finance expansion. At the same time, there are also millions of potential investors looking to connect with and become a part of their favorite brands.

The likelihood that equity crowdfunding will challenge traditional assumptions about return on investment should frame our discussion of investor protection and other issues related to this exciting new source of capital formation.

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