Among these, the crowdfunding market caters to small and micro enterprises. China’s small and micro enterprises face a funding gap of more than US$3 trillion, providing a huge potential opportunity for crowdfunding.
In 2014, China’s crowdfunding platforms hosted close to 3,800 crowdfunded projects. These are dominated by consumer goods initiatives, with a particular focus on smart devices. Entertainment industry initiatives such as movies and music are the second largest area of investment, followed by public welfare initiatives.
There are four major business models for crowdfunding in China:
- Equity-based crowdfunding.
- Credit-based crowdfunding, in which the investors receive future interest payments and the principal.
- Rewards-based crowdfunding, where the investors receive the products or services created by the funded initiative.
- Donation-based crowdfunding.
China’s first crowdfunding platform, Demohour, was established in 2011. By 2014, the Chinese crowdfunding market raised a total of US$150m with an annual growth rate of over 120%. In the first half of 2015, there were a total of 211 crowdfunding platforms, of which more than 50 were newly established over the six months. By 2025, Celent estimates China’s crowdfunding market will reach US$50bn.
Investors in crowdfunding include traditional categories such as high net worth individuals and professional investors seeking returns on their investments. Another important segment – unique to crowdfunding – is consumers interested in it as a means to access specialist consumer goods (the rewards-based model), and in some cases participate in their development.
China’s regulators continue to relax the laws relevant to crowdfunding, so as to promote the development of the industry. This will help fulfill regulators’ goal of increasing the proportion of direct financing, reducing social financing costs, and allowing for more financial resources to be channeled into the real economy. At the same time, a regulatory restriction on crowdfunding that limits project investors to a maximum of 200 shareholders per initiative is a clear constraint on market growth.
Currently, crowdfunding in China is dominated by comprehensive platforms; that is, platforms supporting organizing funding across a variety of industry areas. Leading players include Jingdong Crowdfunding, which accounted for roughly one-third of crowdfunded financing in China in 2014, Zhongchou.com, and Taobao Crowdfunding. These platforms are overly homogenous in terms of their features and business models, which limits the growth potential of the crowdfunding market.
The establishment of specialised crowdfunding platforms focused on specific project areas is unlocking additional opportunities in the market. For example, Demohour, China’s first crowdfunding service, focuses on smart devices. Demohour’s model supports an ecosystem of smart product enthusiasts, by giving them access to new devices, manufacturers and retailers; thereby creating a whole new business model in the smart device industry. There are also specialist crowdfunding platforms focus on music or television production, real estate and agricultural projects.
To drive further expansion of the market, some crowdfunding platforms are starting to provide comprehensive supporting services for project initiators, to improve mechanisms in the crowdfunding ecosystem, and to develop features that facilitate social relationships between investors and project initiators. The following areas are key to supporting the continued expansion of the crowdfunding market in China:
- Providing comprehensive services to project initiators. In addition to this function, some crowdfunding companies provide a series of customised services such as project packaging, media relations, investment recommendations, distribution and post-investment management of projects.
- Perfecting the mechanisms of the crowdfunding ecosystem. Improving project integration, market valuation techniques, exit mechanisms and risk management are key to establishing a tighter ecosystem binding investors and project initiators.
- Building strong social relationships between the investors and initiators. While the relationship between traditional buyers and manufacturers of products is weak, crowdfunding investors and initiators have a potentially strong social relationship. In the case of smart devices, investors often play the role of fans and product testers for the project initiators. Crowdfunding platforms can facilitate the development of strong crowdfunding relationships with features for interaction. Headfunder is an example of this trend of crowdfunding socialis
Banks in China see the potential in crowdfunding and have started introducing their own crowdfunding initiatives. Examples are a crowdfunding programme by Shanghai Pudong Development Bank in the area of entertainment, and a real-estate focused programme by the PingAn the financial group. We can expect to see more involvement by China’s banks in crowdfunding in the future.
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