What is P2P Crowdfunding “Skin in the Game”?

In the growing world of P2P crowdfunding, a concept known as “skin in the game” has gained prominence. This term refers to a situation where platform operators or founders invest their own money into the projects they offer to investors. “Skin in the game” is vital in creating confidence among potential investors, ensuring that the platform itself has a vested interest in the success of its projects. In this article, we’ll dive deep into what it means, why it matters, and how to spot it.

Understanding “Skin in the Game” in Crowdfunding

The phrase “skin in the game” essentially means a personal financial stake. In the context of P2P crowdfunding, this means that the platform’s founders or project creators have invested their own money in the projects they list. By doing so, they communicate a commitment to the success of the project, making it less likely that they would promote risky or low-quality investments.

In P2P lending and crowdfunding, “skin in the game” serves as a reassurance for investors. When platform operators or founders invest alongside their users, it demonstrates alignment in objectives — a powerful factor in encouraging participation from a broader audience.

Why “Skin in the Game” Matters in P2P Crowdfunding

“Skin in the game” in P2P crowdfunding offers several key advantages:

1. Increased Trust: Investors are more likely to trust platforms where operators or founders are invested in their projects. This approach mitigates the risks often associated with high-yield crowdfunding campaigns and builds confidence in potential returns.
2. Higher Standards of Due Diligence: Platforms with a stake in their projects tend to conduct thorough due diligence before listing an investment opportunity. This process helps ensure that investors are not left vulnerable to high-risk or poorly-vetted projects, providing a level of security that is often appreciated in the alternative investment market.
3. Alignment of Interests: When the platform invests in its projects, it aligns its success with the success of its users. This encourages a greater degree of responsibility in the vetting process, as the platform also stands to lose money if the project fails.
4. Long-Term Value Creation: Platforms that implement “skin in the game” tend to focus on long-term project success rather than quick returns, fostering a more sustainable approach to crowdfunding that can lead to more reliable investment returns.

Examples of “Skin in the Game” in P2P Crowdfunding

In the P2P market, some platforms are known for adopting the “skin in the game” approach. Platforms like Mintos and Bondora are well-known European examples, focusing on this approach to attract and retain investors who value security and transparency.

For instance, Mintos often has loan originators who invest their own money in the loans offered on the platform. This model means that the originators retain a share of the loan, providing a safety net for investors if borrowers default. Meanwhile, Bondora also promotes transparency and security, which is particularly valuable in the world of unsecured loans.

How “Skin in the Game” Works in P2P Crowdfunding Models

In P2P crowdfunding, “skin in the game” can manifest in different ways depending on the platform’s structure:

1. Platform Stakeholding: In this model, the crowdfunding platform directly invests in each project listed. By sharing the financial risk with investors, the platform shows a commitment to only offering high-quality projects.
2. Loan Originator Stakes: On platforms like Mintos, the loan originator invests in a portion of each loan. This co-investment is crucial as it means originators are incentivized to select only projects they believe in, minimizing the likelihood of default.
3. Equity-Based Investments: In equity-based crowdfunding, skin in the game often comes in the form of founder investment. Founders who retain an equity stake in their projects signal long-term commitment to growth, aligning interests with investors who expect returns through dividends or capital appreciation.

Spotting “Skin in the Game” in Crowdfunding Projects

Identifying whether a platform uses a “skin in the game” model is essential for informed investing. Here are some factors to consider:

• Platform Investment Policy: Check if the platform lists any self-investment policies or requirements for loan originators to retain a portion of each loan. Transparent policies are a positive indicator of the platform’s commitment.
• Originator Stakes: In the case of platforms that work with third-party originators, determine whether originators hold part of the loan value. This information is often shared on the platform’s FAQ section or specific loan listings.
• Founder or Creator Commitment: For equity-based crowdfunding, investigate whether the founders have retained an equity share in the project. This approach signals their confidence in the project’s success and long-term viability.

The Benefits and Drawbacks of “Skin in the Game” for Investors

While the “skin in the game” approach offers clear benefits, investors should be aware of potential drawbacks:

Pros:

• Improved trust and security due to shared risk
• Platforms are incentivized to vet projects rigorously
• Creates long-term, value-oriented investments

Cons:

• Smaller platforms may not have the capital to invest in every project
• Investors should verify that “skin in the game” is more than a marketing strategy

Conclusion

“Skin in the game” is a powerful concept that has gained traction within P2P crowdfunding due to its potential to enhance trust and security in investments. By aligning platform operators’ and investors’ goals, it offers reassurance for those wary of high-risk or speculative investments.

In your journey toward investment, look for platforms like Mintos and Bondora that implement this strategy to minimize risk, allowing you to confidently explore the diverse world of P2P crowdfunding.

FAQ: What is P2P “Skin in the Game”