In 12 months, anything related to crowdfunding is going to be radioactive

Wonderful (and ominous) article to mark the top of the first real crowdfunding cycle. It’s going to be ugly, but the model (and at least some of the current players) will emerge stronger and cleaner on the other side with a more mature business model and a more qualified and risk-aware investor base.

First of all – while it’s camouflaged as a relatively short article, it’s really more of a treasure trove of cliches to mark the peak in any specific business. Let’s look at some of them:

“Generally, raising money takes so much time,’’ said [house flipper] Sifakis, 33. “This offers so much flexibility and time savings. It’s so much better than going to family offices, banks or Wall Street firms.’’

Generally, family offices, banks or wall street firms (i said GENERALLY!) know how to assess risk. So it’s much more difficult to raise money from them. By some miracle of creation, it’s much easier to raise this money from generally much less informed investors. Who would have known!?

House flippers and property developers are increasingly crowdfunding/…/ For riskier ventures, such as building new homes and buying, renovating and selling existing ones, they’re finding quick financing can be easier to get online than from banks.

So qualified, established counterparties are slow and drag their feet on useless bureaucracy like due diligence. Faster options are preferable. “Bodes well” for the quality of the underlying assets.

“We’ve seen some things where the entity that’s supposed to own the property doesn’t actually own it,’’ she [due-diligence services provider for online investors] said.

Rigorous crowdfunding/p2p screening processes apparently sometimes let fraud pass through the cracks. Probably no connection to origination volume being the primary incentive in the business.

“If you’re originating and selling, you’re just trying to get as much volume as you can,’’/…/ “In order to get more borrowers in the door, you start to drop underwriting guidelines.’’ [said the only non-originator].

Ok, maybe SOME connection.

“Whenever you see a big difference between the terms on which you can raise money in one market versus another market, something is wrong in at least one of those markets,” [Erik] Gordon [a law professor at the University of Michigan in Ann Arbor] said. “It usually is the market with the least-experienced players, and they usually end up wishing they hadn’t played.”

To me, this seems like Buffet vs Blodget pre Y2K. Either the people who have been doing this successfully for decades are right or just some guy and his uncle who are really good at beekeeping are right. Who to bet on…? And now for the gold:

“It’s the greatest thing in the world,’’ [house flipper] Sifakis said. “The amount of money you can raise isn’t limited by anything but their investor base. And the investor base is growing and growing.”

Dot-com bubble much?

To end on a more positive note:

  1. There’s probably still some time to stop piling in and start getting out, as the project cycle for this type of stuff is relatively long. There’s no doubt bullshit projects and shitty credits are already getting funded en masse, but senator Warren grandstanding on the shoddy practices of risk managers at p2p lenders and crowdfunding platforms is still at least a year away.
  2. When all the dust settles and average Joe wonders yet again, why “they took my money and noone is responsible,” the model itself is probably going to prove to be sustainable. Disintermediation (of sort) is here to stay. Unless they regulate it to death because people were stupid with their money. But it is probably going to look a bit different than the wild west it is now. This is after all the first complete cycle for crowdfunding/p2p lending. After this, it will be a mature business.

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