donderdag 16 mei 2013

Tomorrows banks are todays crowd funding websites

Innovation is the key to a more prosperous world.

A while ago, I coincidently learned about the extremely rapid pace, at which Dutch crowd funded financing is growing. Apparently, in the Netherlands, for the last two years, each year, the total sum of funded financing has increased with an astonishing factor 5 [1].

What impact will this have on traditional investment?

If crowd funding proves to be the better alternative for traditional investing, which it appears it is, we can roughly estimate the future sums invested by traditional investment institutions. Let me give you a short flash of the future based on some not too bold assumptions. First an historic example of a technology finding its superior alternative is presented:

When a technology finds its better alternative; the sudden and rapid death of the steam engine 

As a reminder, this is what happens to a technology that is confronted with a better alternative. In this case the total number of steam engines deployed in the United States [2].

Compared to their "competition", steam engines were bulky in size, slow to get started, and highly inefficient. More reliable, less bulky, quick starting and more efficient electrical engines and internal combustion engines were in the end completely taking over. An industry had been virtually wiped out!

Traditional investing in the Netherlands

From historic data of the Dutch central bank concerning the total assets (balance totals) of Dutch monetary financial institutions and a "best guess" S-curve fit on the data given, the following graph can be obtained [3]:

These figures are a rough indication for the total invested sum in the Netherlands. In 2008 the total assets of Dutch investment institutions started to deviate from the idealised S-curve fit. For that reason, the inflexion point of the S-curve fit is set to be the year 2008. In order to grasp the figures on the ordinate, the highest number thereon reflects 5 trillion Euro (5 x 10^12) , about half the GDP of the USA. This figure is equalling 5000 billion Euro or 5 million times a million Euro. The saturation of investments in the Netherlands based on this fitted curve appear to be around 4,5 trillion Euro.

Crowd funding in the Netherlands

An S-curve can similarly be fitted on the -rather modest number of only three- data points of the total funds raised through this relative new medium. A further assumption for the fitted S-curve is that the total invested crowd funding sum in a saturated state will be the same as the total assets sum of traditional Dutch investing in its saturated state. Since the crowd funded amounts are relative small compared to the total Dutch investment assets, the S-curve is fitted using a logarithmic scale [1]. The result of the S-curve fit is given by the following graph:

In this graph the saturation of the total invested sum is assumed to equal that of traditional investing and lies around 4,5 trillion Euros. As this graph is plotted in a linear scale, the following image emerges:

It becomes clear that it is rather impossible to fit an S-curve on the data in a linear scaled graph. The numbers are, in a relative sense, that small, that they all seem to coincide with the abcis. In this scale, crowd funding becomes noticeable only after the year 2016, when a sum of 10 billion is crowd funded.

The future of investing in the Netherlands

If we now assume traditional investing finds its better alternative in crowd funding and that the total invested sum remains unchanged, such that there exists an virtual "squeezing out" of the old technology by the new technology, the following picture can be deduced. Please note, this is a calculated result, based upon the herein above stated assumptions.

In this picture, the green dotted line represents the future total invested sum of traditional Dutch investing institutions, when a full replacement by crowd funding occurs.

In this model, in 2017 crowd funding will for the first time induce a noticeable decrement of the sum of traditionally invested money, and by the year 2022 crowd funding has possibly completely wiped out traditional investment.

Is crowd funding truly a better alternative to traditional investment?

In many ways I think it is.

Indeed when crowd funding is compared to the internal combustion engine, some striking similarities can be seen. The light weight system, the speed and the efficiency of crowd funding financing is indeed superior to that of traditional investing, like the internal combustion engine was to the steam enigne. When the predicted graph of the traditional investment institutions is compared with the development of the steam engine, well traditional investment may eventually disappear at a similarly rapid and abrupt way as did the steam engine.

My advice to traditional investment institutions, banks and pension funds therefore can only be: get involved in crowd funding soon or else be prepared for harsh times.

To crowd funding initiatives I can only give my deepest respect. Bringing an alternative to a traditional sector that is heavily depending on governemental support is among the most difficult tasks imaginable:

Ladies and Gentlemen, please carry on, time for change will come, you will become tomorrows banks.

Sources and literature:


[2] Data points from historical USA sensus data.

[3] Data of DNB,