Crowdfunding is the process of sourcing funds from a large number of people (a ‘crowd’). This method of funding has gained new popularity thanks to the increased use and dissemination of information and communication technologies (ICT).
Problems and Purpose
At its most basic, crowdfunding is the process of sourcing funds from a large number of people (a ‘crowd’). This method of funding has gained new popularity thanks to the increased use and dissemination of information and communication technologies (ICT) among the general population in many countries. Apps and online services such as Paypal, GoFundMe, IndieGoGo and Kickstarter facilitate the donation or fund-transfer process between individuals and fund-seekers. With barriers to funding decreased, small organizations – so called ‘start-ups’ – and grassroots projects are better able to compete with large corporations that often have multinational sources of revenue through stock or shareholders on the public market.
The increasing dominance of large, multinational corporations leaves little room in the market for small entrepreneurs and grassroots initiatives. However, the increasing use of ICT around the world has given many of these start-ups direct access to an audience of potentially interested funders. New technologies have made crowdsourcing a viable funding option which signals a shift aware from the volatile, consumer driven world of the public market. Now, anyone with an internet connection can donate as much or as little as they see fit to projects and ventures they find worthwhile.
Origins and Development
Crowdfunding is not a new phenomenon. Conceived as an alternative finance model, crowdfunding traces its roots back to early book-publishing days with the use of ‘praenumeration’ or subscription schemes. Often, authors and publishers would advertise upcoming titles or new projects in books with the option to mail-in or deliver funds to a fixed address. Improvements in various technologies such as communications and travel has made crowdfunding an increasingly viable financial model on which to launch or carry-out various projects. The newspaper, for example, was used to raise funds for the Statue of Liberty when government financers failed to deliver. Use of the internet for crowdfunding became popular in the late 1990s and has since become a multi-billion-dollar source of finance. Forbes estimates that crowdfunding may supplant venture capital as the main source of finance. From $880 million dollars pulled in in 2010 to $16 billion in 2014 and $34 billion in 2015, the eclipse of the venture capital market is expected in the near future.
How it Works
Funders are largely self-selected although some projects may have enough base-line income to target certain audiences through media and advertising. Public video-hosting sites such as YouTube have often been used by projects and organizations to disseminate their message to a large audience in the hope of attracting donors. The choice of crowdfunding platform is up to the organizers.
Crowdsourcing generally involves three parties: those seeking funds, the ‘crowd’ of potential backers, and a mediating platform between the two. The decision to use crowdfunding as a source of finance is wholly up to those involved in the project. While initially more of an ‘alternative’ financing model (compared with that of venture capitalists), crowdfunding has become a more accepted funding method used by, among others, NGOs, entrepreneurs, tech start-ups and artistic projects.
The amount of say funders have over the final result is often limited. While crowdfunding is technically a form of crowdsourcing, its emphasis is on financial assets – whether in USD or electronic currency – not ideas. Most often, those who invest a base-line amount at the beginning (which largely depends on the estimated final cost) are promised one or more units of the final product. For example, ‘Star Citizen’ is the second-highest grossing crowdfunded venture with pre-purchase in-game items offered as pledges on the developer’s website. Alternatively, crowdfunding can be used for charitable ventures with willing financiers receiving a proof of purchase and the knowledge that they are supporting a cause they care about.
Inherent in the crowdsourcing model and, indeed, in any form of investment is the potential for the project to fail. The ‘grassroots’ or ‘small-time’ nature of fund-seekers is both positive and negative. On the one hand, some projects have few – if any – staff and there may be more open dialogue between creator and backer which increases trust levels. On the other hand, originators may mislead their backers (willingly or not) as to their operational capacity which turns out to be insufficient to the fulfilment of their goals. In any case, the risk inherent in investment is assumed to be known by backers and neither the project creator nor the payment mediator claim responsibility for partial or complete project failure.
The role of mediator is most commonly played by web platforms such as KickStarter and PayPal. Usually, fund-seeking developers retain control over their products’ copyrights or trademarks but allow their host to take a share of the funds raised. Fees collected depend on, for example, number of services offered such as EFT compatibility or acceptance of electronic currency. Mediating platforms also contain lengthy terms-of-use agreements which restrict the kind of projects individuals or organizations can fund. For example, projects whose end use is deemed unlawful may be shut down.
Analysis and Lessons Learned
While the crowdfunding model requires significant trust on the side of backers and acceptance of mediator’s terms-of-use (including charges), it nevertheless represents a fundamental democratization of the entrepreneurial market. Small-time ventures such as experimental technologies, art projects and humanitarian work have often struggled to convince investors using a venture capitalist scheme since the public market is dominated by large corporations. By allowing the transfer of micro-payments between creators and individual citizens, crowdfunding offers small-time developers the ability to ‘get a foot in the door’. At the very least, developers are often able to raise enough money to accomplish their objectives although this does not necessarily translate into profitability. Regardless, those with a specific goal or project in mind can now submit their ideas to the online ‘crowd’ and allow individual interest – rather than market demand – to determine its worth.
The outcomes of crowdfunding are numerous. Examples of projects funded through this model include Oculus Rift – the first publicly accessible virtual reality headset which has spurred studies on it’s potential to build empathy and social trust. As well, crowdfunding entered the world of politics in a significant way in 2014 when Lawrence Lessig created the ‘Mayday PAC’ with the intent to convince the United States Congress to reform campaign finance laws.
The fact that crowdfunding is predicted to eclipse venture capitalism in terms of financial viability is testament to its success. A more detailed analysis of the trade-offs inherent in the funding model is required here but a few points can be made. First, the model makes it easier for entrepreneurial ventures to gain investors since the minimum payment required of individuals is usually quite low. Second, while the model does not reduce the risk of failure, it prevents investors from holding creators responsible for their inability to complete a project. It may be found that this lack of accountability lessons the incentive to invest; however, this may be made up for by the increased number of potential investors. Finally, the increase in consumer/investor agency is a welcome change in a world increasingly controlled by multinational corporations operating in the global market economy.
 “Crowdfunding,” Wikipedia. https://en.wikipedia.org/wiki/Crowdfunding#History
 Chance Barnett, “Trends Show Crowdfunding To Surpass VC In 2016,” Forbes. http://www.forbes.com/sites/chancebarnett/2015/06/09/trends-show-crowdfu...
 “Star Citizen,” Wikipedia. https://en.wikipedia.org/wiki/Star_Citizen
 “Mayday PAC,” Wikipedia. https://en.wikipedia.org/wiki/Mayday_PAC
'Higher Stakes for Crowdfunding,' Bloomberg: https://www.bloomberg.com/quicktake/crowdfunding
'11 Innovative Crowdfunding Platforms for Social Good,' Mashable, https://mashable.com/2011/10/20/crowdfunding-platforms-social-good/
'Crowdfunding and Ownership in the Sharing Economy,' Shareable: https://www.shareable.net/crowdfunding-and-ownership-in-the-sharing-economy/