Social finance is continuing to move into uncharted territory in Canada. However, while crowd equity has yet to barge through the regulatory schema in most Canadian provinces (with the exception of Saskatchewan—see more on its equity crowdfunding proposal here), I decided to look closer at the role crowdfunding can play as a direct competitor, substitute or partner in crime to impact investment.
Before diving into this discussion, I feel that we need to take a few steps back and look at the social finance space, and where, based on its definition, crowdfunding platforms have already and have the potential to fit in. The word social in social finance typically refers to something which is of benefit to the welfare of individuals comprising a given community. Individuals’ welfare within this community depends on multiple factors, including the sustainability and cleanliness of the community and the equity of opportunities available to the community’s members within and outside of its precincts.
This equity of opportunities is precisely what Danae Ringelmann (co-founder of IndieGoGo, one of the world’s largest crowdfunding platforms) stressed as being at the centre of the crowdfunding giant’s mandate—to prioritize the democratization of the financial system. So much so, that, despite the recent controversies regarding crowdfunding fraud (see this snapshot of some divergent uses of funds raised through crowdfunding platforms here), IndieGoGo continues to stay away from curatorship. It prides itself on promoting a faith-based system, which gives every idea equal freedom, and thereby emphasizes the role of crowdfunding as a key tool in unlocking market interests.
But when putting crowdfunding capital transfers and standard market transactions side by side, do we have an apples-to-apples comparison? When a knowledgeable consumer goes to purchase a product through a well-established platform such as Amazon, is she faced with the same risks as those faced by funders of “Kobe Red – 100% Japanese Beer Fed Kobe Beef Jerky” (a fraudulent Kickstarter campaign which almost ran off with the $120,000 it raised through the platform, before Kickstarter axed the project)? And is this consumer motivated by the same drivers as those propelling him to contribute to crowd-funded start-ups? Does groupthink diminish the perception of risk for a crowdfunder? Is there a fragment of altruism associated with giving to a ‘collective wallet’ to fund an initiative, versus making an isolated purchase?
The question remains: can the socializing of finance be synonymous with social finance? Before you lock in your answer, I would like to put the spotlight on another crowdfunding platform—CSI’s Catalyst. In acknowledging the democratic underpinnings of crowdfunding, Catalyst has sought to do more than facilitate supply and demand dynamics. Its co-founders, Chris Charlesworth and Asier Ania, stressed the importance of educating consumers about the viability of crowdfunding–showcasing crowdfunding as a mechanism for individuals to become more financially engaged. In addition, all of the campaigns on this platform are CSI members, which means that every dollar contributed to a venture through the Catalyst platform will trickle down an intricate supply chain geared toward social growth. A dollar spent here will have far-reaching resonance in the CSI community. Campaigns in the Catalyst world are part of an intertwined network, and accountability and growth are the primary catalysts for the viability of this platform.
Chris and Asier are beaming with the community reach of their platform. They estimate that 40-60% of those enterprises which are funded on their platform are run by women, with those run by minorities not far behind. Since Catalyst is in a sense strengthening webbing within local communities, it could be argued that successful minority-lead initiatives will prompt financial engagement from funders in these minority groups (or vice versa), thereby creating a robust cycle of participation and growth among typically vulnerable fractions of the population. The mission, as Chris and Asier emphasize, is to contribute to a global movement and to internationalize financial participation and social development.
Unlike many other crowdfunding platforms, Catalyst stresses impact as the integral component of those ventures it brings under its umbrella. Chris and Asier stipulate that social causes are more attractive for donors, as people are more likely to see their dollar make a contribution to someone’s well-being. In this sense, social causes should see more traffic on crowdfunding platforms than other sectors. Interestingly enough, this may not necessarily be true for impact investing—where investors who are still operating under traditional financial mandates could reasonably be expected to put their wealth in sustainable food, cleantech, housing, or community infrastructure, says Adam Spence (manager of special projects at the MaRS Centre for Impact Investing). The returns to these sectors, he observes, are more direct and tangible, and provide a more transparent risk-reward trade-off for wary newcomers.
As it stands today, crowdfunding and impact investing are not yet playing in the same sandbox. Crowdfunding is estimated to account for approximately $3 billion worldwide, while impact investing amounts for nearly $5billion in Canada alone. Regulations aside, the potential for growth, according to Adam, is the same for both financial channels; however, it is ultimately impact investing which is more conducive to large amounts of capital to change hands. However, looking at Pebble watch (and the $10 million it raised on Kickstarter), Chris and Asier could not help but emphasize the enormous potential for crowdfunding to be both a complement and a substitute for impact investing. It has the capacity to be both a fund-raising and a market validation mechanism, both explain with enthusiasm.
The idea that crowdfunding failures and successes could serve as investment signals to venture capitalists and impact investors is slowly picking up traction in off-record conversations (I share more thoughts on this in my latest blog). However, the question of the existing and necessary regulatory frameworks is still at the forefront. How can authorities put in place a regulatory structure that will:
- Stimulate other Canadian jurisdictions to follow Saskatchewan’s footprints;
- Protect consumers against fraud occurrence and intensity lurking in the corners of a generally-unaudited market, and also
- Ensure that the democratization of the market is not suffocated in the process?
Should crowdfunding platforms take it upon themselves to do their due diligence and engage in portfolio auditing, much like the vetting process endorsed among microfinance organizations? Is there room for campaigns utilising crowdfunding platforms to self-regulate and instigate community accountability practices? It is evident that crowdfunding is socializing finance, but in order for this tool to become sustainable, credible and relevant to impact investors and donors, we may need to reopen the conversation of how to find an equilibrium between financial regulation and financial inclusion.
[I would like to extend a special thank you to Danae Ringlemann, Adam Spence, Chris Charlseworth and Asier Ania for sharing their candid, insightful and inspiring thoughts and experiences.]
