Alternative Finance Platforms and the Product Adoption Lifecycle

Crowdfunding and peer-to-peer financing platforms have come a long way in the 20 years since their introduction to the lending marketplace. Consequently, before to the introduction of these innovative alternative finance models, those that needed financing for high-value real estate projects sought primarily traditional financing methods. In general, these sources included private money, venture capitalists, conventional lenders, and public offerings. Today, there are many more options that have withstood the test of two decades of practical application in the fast-paced and volatile lending industry.

History of Alternative Finance

Crowdfunding and other alternative finance methods have a long history that dates to early civilization and the raising of funds by groups for various civil and private projects. Investors have always worked together to achieve greater returns through larger, collaborative projects. As an example, book publishers often used subscription models to raise funds for other projects. Bonds are another form of crowdfunding historically used by governments to obtain lesser amounts of capital from many individual investors with a guaranteed return.

The evolution of digital communication technologies and the need for greater access to capital continues to support the utilization of crowdfunding approaches. Alternative finance models allow businesses and investors to meet their mutual goals. Today, technology provides greater geographic reach for both parties to transactions and offers investments management by experienced professionals. Additionally, crowdfunding professionals diligently research and verify the credibility and solvency of project sponsors and relieve accredited investors of management responsibility.

The Product Adoption Lifecycle

How established is crowdfunding as an alternative finance and investment model? Is crowdfunding a reliable and safe way to invest substantial amounts of money?

The product adoption lifecycle consists of 5 key stages. These are described according to the groups that are willing to embrace the service as it evolves and becomes established. These stages include innovators, early adopters, early majority, late majority, and laggards. Each of these phases indicates the risk consumers and investors are willing to take in trying a new offering. Innovators are typically the readiest to try a new service despite the unproven status of the technology. Whereas early adopters will typically wait until the service has been established and move forward after the innovators have tested and reviewed the concept.

The greatest acceptance for a new model occurs during the early and late majority phase. By this point, the concept has gained enough credibility for the general population to start using and relying on the service. Finally, the last phase includes the laggards who will use a service after it has become accepted by the mainstream, and the benefits have become clear. Furthermore, the cost of a service can also tend to decrease throughout the product adoption lifecycle. The exception to this is when the demand dramatically increases, and insufficient supply is available to satisfy.

Where We’re at in the Adoption Curve

How does this apply to alternative finance and crowdfunding?

When online crowdfunding first emerged in the early 2000s, many were suspicious. However, the few innovators that understood the appeal of its potential capital raising and return generating power took the risk. This helped build and prove the crowdfunding model. By the late 2000s, online real estate investment had already moved into the early majority phase and became widely accepted as a viable form of finance and investment. Today, alternative finance has reached the late majority phase of the adoption cycle. The benefits of shared risk in investment and the dramatically expanded availability of opportunities has made crowdfunding an accepted and well utilized resource in the modern finance and investment landscape.

The Future of Alternative Finance

What’s next for alternative finance? Will there be a new model that will radically change the way accredited investors and project sponsors look at investment?

Currently, a new trend is emerging with the development of cryptocurrency and Initial Coin Offerings (ICOs). Cryptocurrency is a new form of finance built on blockchain technology. The blockchain is the interconnection of millions of computers. Each work together to securely resolve and maintain an open record of transactions. For real estate investors of the future, blockchain and ICO essentially provide a new form of crowdsourcing. The current drawbacks of blockchain, and ICOs as a funding strategy are the greater risks of the unproven technology. The perceived risks include regulatory uncertainty and the instability of the concurrency marketplace. Additionally, many fraudulent projects are attempting to draw unsuspecting investors and borrowers.

It’s hard to say what new developments will emerge in the coming decades. The essence of shared risk and collaborative investment will continue in some form. Investors will always seek greater opportunities and returns. What we know is that crowdfunding, while still innovative, is a reliable, safe, and proven online real estate investment technology. It offers minimal risk, and access to capital that far exceeds the traditional financing approaches. Peer-to-peer lending and alternative finance will always find innovative new ways to bring greater value and risk reduction to investors.