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.
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, to debt and equity opportunities.
As the recession continued to impact bottom lines, Congress shepherded the Jumpstart Our Businesses (JOBS) Act, giving credence to 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. 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 sought crowd approval, reducing demand risks.
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.
Read my original piece on InfraShares.com and learn more about how this crowdfunding platform is stepping up.