Crowdfunding

Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the internet.[1] One early-stage equity expert described it as “the practice of raising funds from two or more people over the internet towards a common Service, Project, Product, Investment, Cause, and Experience, or SPPICE.”[2]

The crowdfunding model is fueled by three types of actors: the project initiator who proposes the idea and/or project to be funded; individuals or groups who support the idea; and a moderating organization (the "platform") that brings the parties together to launch the idea.[3]

In 2013, the crowdfunding industry grew to be over $5.1 billion worldwide.[4]

History

According to WordSpy.com, the earliest recorded use of the word "crowdfunding" was by Michael Sullivan in fundavlog[5] in August 2006.[6] Crowdfunding as a concept pre-dates the internet and projects like the Statue of Liberty raised funds from a large number of donors.

Crowdfunding gained traction after the launch of ArtistShare, in 2003.[7][8][9] Following ArtistShare, more crowdfunding sites started to appear on the web such as EquityNet (2005),[10] Pledgie (2006), Sellaband (2006), IndieGoGo (2008), GiveForward (2008), FundRazr (2009), Kickstarter (2009), RocketHub (2009), Fundly (2009), GoFundMe (2010), Microventures (2010), YouCaring (2011), SeedInvest (2011) and Fundageek (2011).[9][11]

Crowdfunding websites helped companies and individuals worldwide raise US$89 million from members of the public in 2010, US$1.47 billion in 2011 and US$2.66 billion in 2012—US$1.6 billion of the 2012 amount was raised in North America.[12] In 2012 more than one million individual campaigns were established globally[13] and the industry was projected to grow to US$5.1 billion in 2013.[13]

A May 2014 report, released by the United Kingdom-based The Crowdfunding Centre and titled "The State of the Crowdfunding Nation", presented data showing that during the month of March 2014, more than US$60,000 dollars were raised on an hourly basis via global crowdfunding initiatives. Also during this time period, 442 crowdfunding campaigns were launched globally on a daily basis.[14]

Types

The Crowdfunding Centre's May 2014 report identified the existence of two primary types of crowdfunding:

  1. Rewards Crowdfunding: entrepreneurs pre-sell a product or service to launch a business concept without incurring debt or sacrificing equity/shares.
  2. Equity Crowdfunding: the backer receives shares of a company, usually in its early stages, in exchange for the money pledged. The company's success is determined by how successfully it can demonstrate its viability.[14]

Rewards-based

Reward-based crowdfunding has been used for a wide range of purposes, including motion picture promotion,[15] free software development, inventions development, scientific research,[16] and civic projects.[17]

For a joint study between Toronto, Canada's York University and Universite Lille Nord de France, in Lille, France, published on June 2, 2014, two types of reward-based crowdfunding were identified: "'Keep-it-All' (KIA) where the entrepreneurial firm sets a fundraising goal and keeps the entire amount raised regardless of whether or not they meet their goal, and 'All-or-Nothing' (AON) where the entrepreneurial firm sets a fundraising goal and keeps nothing unless the goal is achieved."[18] The study's researchers analyzed 22,875 crowdfunding campaigns, with targets of between US$5,000 and US$200,000, and concluded: "Overall, [all-or-nothing] fundraising campaigns involved substantially larger capital goals, and were much more likely to be successful at achieving their goals." In its review of the study outcomes, the Inc.com publication explained that potential investors are more inclined to support "all-or-nothing strategy" initiatives, whereby a substandard product will not be released if the funding goal is not achieved. The Inc.com review concluded that "AON" campaign typically provide more detailed information on the campaign.[19]

Equity

Equity Crowdfunding is the collective effort of individuals to support efforts initiated by other people or organizations through the provision of finance in the form of equity.[20][21] In the United States, legislation that is mentioned in the 2012 JOBS Act will allow for a wider pool of small investors with fewer restrictions following the implementation of the act.[21]

Debt-based

In the U.S., debt-based crowdfunding from non-banks became more prominent as a form of crowdfunding in 2012, with the launch of the Lending Club, which had advanced more than US$500 million in loans via its website by April 2012. Prospective borrowers of the Lending Club first submit their requirements, and are then matched with pools of investors who are willing to accept the credit terms. Platforms such as the Lending Club gained popularity, as banks increased interest rates or reduced their level of lending activity. Another credit-based platform, Prosper.com, was established in 2006 and had funded nearly US$325 million in personal loans by April 2012.[22]

Litigation

Litigation crowdfunding allows individuals to invest in legal disputes, globally, allowing those in need of litigation funding anywhere in the world to obtain it from their peers. Individuals are given a stake in the claim they have funded, which allows individual funders to multiply their investment in justice many times over if a case succeeds.[23]

Charity

Charity crowdfunding is the collective effort of individuals to help charitable causes.[24]

Role of the crowd

The inputs of the individuals in the crowd trigger the crowdfunding process and influence the ultimate value of the offerings or outcomes of the process. Each individual acts as an agent of the offering, selecting and promoting the projects in which they believe. They will sometimes play a donor role oriented towards providing help on social projects. In some cases they will become shareholders and contribute to the development and growth of the offering. Individuals disseminate information about projects they support in their online communities, generating further support (promoters).

Motivation for consumer participation stems from the feeling of being at least partly responsible for the success of others’ initiatives (desire for patronage), striving to be a part of a communal social initiative (desire for social participation), and seeking a payoff from monetary contributions (desire for investment).[3]

An individual who takes part in crowdfunding initiatives tends to reveal several distinct traits: innovative orientation, which stimulates the desire to try new modes of interacting with firms and other consumers; social identification with the content, cause or project selected for funding, which sparks the desire to be a part of the initiative; (monetary) exploitation, which motivates the individual to participate by expecting a payoff.[3][21]

Crowdfunding platforms

As of 2012, there were over 450 crowdfunding platforms.[25] Project creators need to exercise their own due diligence in order to understand which platform is the best to use depending on the type of project that they want to launch.[21] There are fundamental differences in the services provided by many crowdfunding platforms.[3]

For instance, CrowdCube and Seedrs are internet platforms which enable small companies to issue shares over the internet and receive small investments from registered users in return. While CrowdCube is meant for users to invest small amounts and acquire shares directly in start-up companies, Seedrs on the other hand pools the funds to invest in new businesses, as a nominated agent.[26]

Curated crowdfunding platforms serve as a "network orchestrators" by curating the offering that are allowed on the platform. They create the necessary organizational systems and conditions for resource integration among other players to take place.[3]

Relational mediators act as an intermediary between supply and demand. They replace traditional intermediaries (such as traditional record companies, venture capitalists). These platforms link new artists, designers, project initiators with committed supporters who believe in the persons behind the projects strongly enough to provide monetary support.

Growth engines focus on the strong inclusion of investors. They dis-intermediate by eliminating the activity of a service provider previously involved in the network. The platforms that use crowdfunding to seek stakes from a community of high-net-worth private investors and match them directly with project initiators.

Origins

A possible early precursor of the crowdfunding business model could be the concept of collective fundraising or praenumeration, a subscription business model, which was used in the 17th century to finance publications planned but not yet printed.[27]

Another precursor would be the cooperative movement of the 19th and 20th centuries, which saw collective groups, such as community or interest-based groups, pooling subscribed funds to develop new concepts, products, and means of distribution and production, particularly in rural areas of Western Europe and North America.

On 1885, when government sources failed to provide funding to build a monumental base for the Statue of Liberty, a newspaper-led campaign attracted small donations from 160,000 donors.[27]

In 1997, fans underwrote an entire U.S. tour for the British rock group Marillion, raising US$60,000 in donations by means of a fan-based Internet campaign.[28][29] The idea was conceived and managed by fans without any involvement from the band;[30] although Marillion has since used this method successfully as a way to fund the recording and marketing of its albums, like Anoraknophobia (2001), Marbles (2004), Happiness is the Road (2008), and Sounds That Can't Be Made (2012).[31]

In the film industry, independent writer/director Mark Tapio Kines designed a website in 1997 for his then-unfinished first feature film Foreign Correspondents. By early 1999, he had raised more than US$125,000 on the Internet from at least 25 fans, providing him with the funds to complete his film.[32]

In 2002 the "Free Blender" campaign was an early software crowdfunding precursor.[33][34] The campaign aimed for open-sourcing the Blender raytracer software by collecting $100,000 from the community while offering additional benefits for donating members.[35]

Significant campaigns

Early campaigns

Electric Eel Shock, a Japanese rock band in 2004 raised £10,000 from 100 fans (the Samurai 100) by offering them a lifetime membership on the band's guestlist.[36] Two years later, they became the fastest band to raise a US$50,000 budget on SellaBand.[37]

Franny Armstrong later created a donation system for her feature film The Age of Stupid.[38] Over five years, from June 2004 to June 2009 (release date), she raised £1,500,000.[39] In December 2004, French entrepreneurs and producers Benjamin Pommeraud and Guillaume Colboc, launched a public Internet donation campaign [40] to fund their short science fiction film, Demain la Veille (Waiting for Yesterday). Within a month, they managed to raise €17,000 online, allowing them to shoot their film.

Highest grossing campaigns

The highest reported funding by a crowdfunded project to date is Star Citizen, an online space trading and combat video game being developed by Chris Roberts and Cloud Imperium Games,[41] which—as of 24 January 2015—claimed to have raised USD$70,000,000, beating the previous record of $10,266,844 set by Pebble Watch.[42]

Another highly successful campaign was initiated by the Tile App company that raised US$2.6 million by July 2013 on the Selfstarter crowdfunding platform.[43] The startup was only looking for US$20,000 to add to the US$200,000 support it had received from Silicon Valley accelerator Tandem Capital. The Tile product is a small device that assists users to locate lost items and works in tandem with an app. The physical product can be attached to items such as keychains, bags and bikes.[44]

Kickstarter campaigns

On April 17, 2014, the Guardian media outlet published a list of "20 of the most significant projects" launched on the Kickstarter platform prior to the date of publication:

For the past 35 years I have collected amazing specimens ... I then carefully break those specimens down into smaller pieces, embed them in acrylic ... Each mini museum is a handcrafted, individually numbered limited edition ... The majority of these specimens were acquired directly from contacting specialists recommended to me by museum curators, research scientists and university historians.[46]

Controversy

Although musician Palmer raised over one million dollars through the Kickstarter crowdfunding process, she received criticism afterwards, some of which was published in prominent media outlets. Writing for the New Yorker, Joshua Clover initially focused upon issues specific to Palmer, but then broadened the scope of his examination to include financial conduct in the Internet era. ("you can’t spell Internet without intern.") According to Clover, Palmer initially invited local musicians to play on stage with her and her band on the stops of her U.S. tour, but offered to “feed you beer, hug/high-five you up and down (pick your poison), give you merch, and thank you mightily,” instead of monetary compensation, as the money raised on Kickstarter was allocated to the production of the next studio album—in accordance with the campaign—as well as other financial commitments.[51] This decision was then overturned a week later, as Palmer explained on her blog:

My management team tweaked and reconfigured financials, pulling money from this and that other budget (mostly video) and moving it to the tour budget. All of the money we took out of those budgets is going to the crowd-sourced musicians fund. We are going to pay the volunteer musicians every night ... We're also retroactively sending a payment to the folks who've already played with us.[51]

Clover also made reference to the British political situation at the time, writing "that even newly minted haves, like Amanda Palmer, really need to treat have-nots, such as local musicians, a whole lot better." In a September 12, 2012 New York Times article, American Federation of Musicians President Raymond M. Hair Jr. explained, "If there's a need for the musician to be on the stage, then there ought to be compensation for it."[52] The following day, prominent sound engineer and musician Steve Albini was also vocal and, after initially referring to Palmer as an "idiot," apologized, writing that he had not met her or heard her music. Following his apology, in which he admits "it's my fault," Albini asserted: "It should be obvious also that having gotten over a million dollars from such an effort that it is just plain rude to ask for further indulgences from your audience, like playing in your backing band for free."[53]

Controversy arose in the crowdfunding sector in May 2014 when an adult entertainer was blocked by platform GiveForward. Following an allergy reaction, Eden Alexander required intensive medical treatment, but doctors, aware of her occupation, associated her health issue with drug use and didn't provide the necessary care to a sufficient extent; as a consequence, Alexander's condition worsened. Alexander then launched a GiveForward crowdfunding campaign to cover her medical bills, but the campaign was removed from the platform after a social media exchange, whereby a potential donor requested nude pictures as reciprocation and Alexander agreed to the offer—this was noticed within a brief time frame and WePay, the payment service used by GiveForward, deemed the negotiation a violation of WePay's terms of service (TOS), considering it the offer of "Adult or adult-related services ... Adult or adult-related content ... and Obscene or pornographic items.” Alexander restarted her crowdfunding campaign by using the services of Tilt.com.[54] The campaign ended on June 13, 2014 with $10,550 raised.[55]

A previous sex industry-related incident affected Andre Shakti, a Bay Area, San Francisco, U.S. sex worker who raised funds on Fundly.com, a platform that promotes itself as an avenue to "Raise Money for Anything.", to attend the 2014 Feminist Porn Awards in Toronto, Canada. Shakti raised US$545 in early 2014, a total that was in excess of her target, and attempted to purchase her plane ticket, but was hindered, like Alexander, by WePay. WePay operates a credit card processor and prevented Shakti from redeeming the funds she had raised; instead, Shakti was informed that she had violated WePay's Terms of Service and her funds could therefore not be processed. Shakti's contributors were refunded, while Kristina Dolgin, director of the Bay Area Chapter of the Sex Worker Outreach Project, in an open letter to Fundly on March 11, 2014, wrote: "Fundly cannot claim to be accessible to all while contracting with a credit card processing company that explicitly is not. This practice is opaque, unfair, and harmful to our disparaged community."[56]

Following the Alexander incident of May 2014, WePay CEO Bill Clerico wrote an explanation of their TOS in relation to adult services to the TechCrunch media outlet:

WePay faces tremendous scrutiny from its partners & card networks around the enforcement of policy, especially when it comes to adult content. We must enforce these policies or we face hefty fines or the risk of shutdown for the many hundreds of thousands of merchants on our service. We’re incredibly sorry that these policies added to the difficulties that Eden is facing. We offered to help her setup a new campaign that complied with our policies, but I believe that her friends chose to work with another company instead. We continue to stand by to help if Eden would like to work with us further, and we are reviewing both our Terms of Service & account shutdown process to see how we can avoid situations like this in the future.[55]

Clerico further stated that such practice is "is a relatively common requirement in the industry" and assured the TechCrunch writer that WePay agreed to cease Alexander's campaign "because we are contractually required to."[55]

Crowdfunding applications

Crowdfunding is being experimented with as a funding mechanism for creative work such as blogging and journalism,[57] music, independent film,[58][59] and for funding startup companies.[60][61][62][63] Community music labels are usually for-profit organizations where "fans assume the traditional financier role of a record label for artists they believe in by funding the recording process".[64]

Since pioneering crowdfunding in the film industry, Spanner Films has published a "how to" guide.[65] A Financialist article published in mid-September 2013 stated that "the niche for crowdfunding exists in financing films with budgets in the [US]$1 to $10 million range" and crowdfunding campaigns are "much more likely to be successful if they tap into a significant pre-existing fan base and fulfill an existing gap in the market."[66] Innovative new platforms, such as RocketHub, have emerged that combine traditional funding for creative work with branded crowdsourcing—helping artists and entrepreneurs unite with brands "without the need for a middle man."[67]

Philanthropy and civic projects

A variety of crowdfunding platforms have emerged to allow ordinary web users to support specific philanthropic projects without the need for large amounts of money.[17]

GlobalGiving allows individuals to browse through a selection of small projects proposed by nonprofit organizations worldwide, donating funds to projects of their choice. Microcredit crowdfunding platforms such as Kiva (organization) and Wokai facilitate crowdfunding of loans managed by microcredit organizations in developing countries.

The US-based nonprofit Zidisha offers a new twist on these themes, applying a direct person-to-person lending model to microcredit lending for low-income small business owners in developing countries. Zidisha borrowers who pass a background check may post microloan applications directly on the Zidisha website, specifying proposed credit terms and interest rates. Individual web users in the US and Europe can lend as little as one US dollar, and Zidisha's crowdfunding platform allows lenders and borrowers to engage in direct dialogue. Repaid principal and interest is returned to the lenders, who may withdraw the cash or use it to fund new loans.[68]

DonorsChoose.org, founded in 2000, allows public school teachers in the United States to request materials for their classrooms. Individuals can lend money to teacher-proposed projects, and the organization fulfills and delivers supplies to schools. There are also a number of own-branded university crowdfunding websites, which enable students and staff to create projects and receive funding from alumni of the university or the general public.

Several dedicated civic crowdfunding platforms have emerged in the US and the UK, some of which have led to the first direct involvement of governments in crowdfunding.

Real estate crowdfunding

Real estate crowdfunding is the online pooling of capital from investors to fund mortgages secured by real estate, such as "fix and flip" redevelopment of distressed or abandoned properties, and equity for commercial and residential projects, acquisition of pools of distressed mortgages, home buyer down payments and similar real estate related outlets. Investment, via specialised online platforms, is generally completed under Title II of the JOBS Act and is limited to accredited investors. The platforms offer low minimum investments, often $100 – $10,000.[69][70]

Intellectual property exposure

One of the challenges of posting new ideas on crowdfunding sites is there may be little or no intellectual property (IP) protection provided by the sites themselves. Once an idea is posted, it can be copied. As Slava Rubin, founder of IndieGoGo said: “We get asked that all the time, ‘How do you protect me from someone stealing my idea?’ We’re not liable for any of that stuff.”[71] Inventor advocates, such as Simon Brown, founder of the UK-based United Innovation Association, counsel that ideas can be protected on crowdfunding sites through early filing of patent applications, use of copyright and trademark protection as well as a new form of idea protection supported by the World Intellectual Property Organization called Creative Barcode.[72]

Benefits and risks

Benefits for the creator

Crowdfunding campaigns provide producers with a number of benefits, beyond the strict financial gains.[73] The following are non financial benefits of crowdfunding.

Proponents of the crowdfunding approach argue that it allows good ideas which do not fit the pattern required by conventional financiers to break through and attract cash through the wisdom of the crowd. If it does achieve "traction" in this way, not only can the enterprise secure seed funding to begin its project, but it may also secure evidence of backing from potential customers and benefit from word of mouth promotion in order to reach the fundraising goal.[21] Another potential positive effect is the propensity of groups to "produce an accurate aggregate prediction" about market outcomes as identified by author James Surowiecki in his book The wisdom of crowds, thereby placing financial backing behind ventures likely to succeed.

Proponents also identify a potential outcome of crowdfunding as an exponential increase in available venture capital. One report claims that If every American family gave one percent of their investable assets to crowdfunding, $300 billion (a 10X increase) would come into venture capital.[74] Proponents also cite that a benefit for companies receiving crowdfunding support is that they retain control of their operations, as voting rights are not conveyed along with ownership when crowdfunding.

As part of his response to the Amanda Palmer Kickstarter controversy, Albini expressed his supportive views of crowdfunding for musicians, explaining: "I've said many times that I think they're part of the new way bands and their audience interact and they can be a fantastic resource, enabling bands to do things essentially in cooperation with their audience." Albini described the concept of crowdfunding as "pretty amazing."[53]

Risks and barriers for the creator

Crowdfunding also comes with a number of potential risks or barriers.[75]

For crowdfunding of equity stock purchases, there is some research in social psychology that indicates that, like in all investments, people don't always do their due diligence to determine if it's a sound investment before investing, which leads to making investment decisions based on emotion rather than financial logic.[76]

Crowdfunding draws a crowd: investors and other interested observers who follow the progress, or lack of progress, of a project. Sometimes it proves easier to raise the money for a project than to make the project a success. Managing communications with a large number of possibly disappointed investors and supporters can be a substantial, and potentially diverting, task.[77]

See also

References

  1. ↑ "Oxford Dictionary Definition of Crowdfunding". Retrieved July 23, 2014.; The Merriam Webster Dictionary defines Crowdfunding as "the practice of soliciting financial contributions from a large number of people especially from the online community" "Merriam Webster Dictionary Definition of Crowdfunding". Retrieved July 23, 2014.
  2. ↑ Drake, David. "CROWDFUNDING: IT’S NO LONGER A BUZZWORD". http://www.crowdsourcing.org''. Crowdsourcing.org. Retrieved June 16, 2014.
  3. ↑ 3.0 3.1 3.2 3.3 3.4 "Crowdfunding: Transforming Customers Into Investors Through Innovative Service Platforms" (PDF). Retrieved February 7, 2013.
  4. ↑ HSBC contributor (August 5, 2014). "HSBCVoice: Crowdfunding's Untapped Potential In Emerging Markets". Forbes.
  5. ↑ "fundavlog".
  6. ↑ "Crowdfundings earliest citation".
  7. ↑ "A Brief History Of Crowdfunding" (PDF).
  8. ↑ The New York Times refers to ArtistShare as a "pioneering crowd-financing platform"Chinen, Nate (May 8, 2013). "New York Times". The New York Times.
  9. ↑ 9.0 9.1 "Can You Spare a Quarter? Crowdfunding Sites Turn Fans into Patrons of the Arts". Wharton. Dec 8, 2010.
  10. ↑ New service helps local entrepreneurs raise capital November 12, 2013 Missouri S&T Andrew Careaga
  11. ↑ MALIKA ZOUHALI-WORRALL. "Comparison of Crowdfunding Websites". Inc.com.
  12. ↑ Global Crowdfunding Volumes Rise 81% In 2012, August 4, 2013, The Huffington Post, Retrieved at September 7, 2013
  13. ↑ 13.0 13.1 Top 10 Crowdfunding Sites For Fundraising, May 8, 2013, Chance Barnett, Forbes
  14. ↑ 14.0 14.1 Catherine Clifford (May 19, 2014). "Crowdfunding Generates More Than $60,000 an Hour (Infographic)". Entrepreneur. Entrepreneur Media, Inc. Retrieved May 25, 2014.
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  35. ↑ Membership People can subscribe to become Foundation Member. Members who subscribe during the campaign period, get additional benefits for their support. During campaign: - Costs: minimum one time fee of EUR 50 (or USD 50) (archived 2002)
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  67. ↑ Bell, Melissa. "Crowd-sourcing a brand", The Washington Post, March 12, 2011, accessed September 3, 2011.
  68. ↑ "Is Microfinance for You?", SecondAct, April 17, 2012.
  69. ↑ O'Connell, Jonathan (June 9, 2013) "Fundrise faces off with skeptical financial services industry over crowd-funded real estate". Washington Post. Retrieved June 26, 2014.
  70. ↑ Simon, Ruth and Brown, Eliot(June 11, 2014). "Real-Estate Sector Moves Crowdfunding Beyond the Trinkets". Wall Street Journal. Retrieved June 26, 2014 (subscription required).
  71. ↑ Mike Drummond, “Making it Rain: Seeking Seed Money from the Crowd”, Inventors Digest, August 2011
  72. ↑ Simon Brown. "Simon Brown, "Follow the Crowd", Intellectual Property Magazine, July 2011". Ipworld.com. Retrieved August 19, 2012.
  73. ↑ "Crowdfunding in a Canadian Context" (PDF). Canada Media Fund. Retrieved February 12, 2013.
  74. ↑ "Gigaom: What crowdfunding means for the VC business". Retrieved October 15, 2012.
  75. ↑ 75.0 75.1 "Oxford Dictionary Definition of Crowdfunding". Retrieved July 23, 2014.
  76. ↑ Isenberg, Daniel (April 23, 2012). "The Road to Crowdfunding Hell – Daniel Isenberg – Harvard Business Review". Blogs.hbr.org. Retrieved August 19, 2012.
  77. ↑ Jenna Wortham (September 17, 2012). "Success of Crowdfunding Puts Pressure on Entrepreneurs". The New York Times. Retrieved September 18, 2012.

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