Crowdfunding can be defined as raising funds from the general public usually through internet platforms in order to support a project started by an individual or an organization. Social media websites play a primary role in this regard, as individuals or organizations looking for funds use these websites to reach out to the general public. Instead of asking a small number of sophisticated investors for large amounts, crowdfunding allows an individual or organization to reach out to a large number of people for smaller amounts of money. Incentives such as profit sharing, free products and samples can also be associated with crowdfunding activity. Upcoming platforms such as iFunding give investors access to real estate investing via crowdfunding. This way, crowdfunding might change the way we invest in Real Estate.
Some scholars argue that Crowdfunding is essentially a subset of Crowdsourcing; a process where organizations reach out to their customers and the general public, and outsource some of their functions to the public in order to get feedback, ideas and solutions. In crowdsourcing, the participants either work for free or for a very small amount.
I am also of the opinion that Crowdfunding is a subset of Crowdsourcing. In Crowdsourcing, the organizations get feedback, solutions, and ideas to improve their processes and/or products. In Crowdfunding, the people’s input is in the form of money and the return varies from project to project.
Although social media websites such as Facebook, Twitter and Google Plus along with several others provide the ideal platform to reach out to the general public for fundraising, several specialized websites have also emerged over the last few years including Kickstarter, Kapipal, Fundable, IndieGoGo, Crowdfunder, Kiva, Chipin, appbackr and iFunding. These websites serve as the middlemen between the person trying to raise the funds and general public (potential crowdfunder). Therefore, some experts have marked a distinction between direct and indirect Crowdfunding; direct being the person looking for funds reaching out to the public him/herself, and indirect being that same person asking a crowdfunding website to do it for him/her.
History of Crowdfunding
Strictly adhering to the definition of crowdfunding, the concept of the general public contributing in order to aid a project is ancient. However, after a thorough online research, I found that the first historically documented crowdfunding event was the completion of the Statue of Liberty in 1885, where the city reached out to the crowd through newspapers and part of the money required to build the statue was contributed by the citizens.
If the definition is limited to necessarily involve the internet, crowdfunding has been going on since the mid 90s and is usually adopted by individuals belonging to the field of entertainment. While upcoming and struggling music artists generally rely on their fans to make their crowdfunding campaigns successful, movie directors and producers usually offer shared profit. In movies where large numbers of extras are required in the background, some upcoming directors also offer the crowdfunders to appear onscreen. Although I could list a number of projects that utilized crowdfunding successfully, but a couple of examples would suffice due to the nature of this article. The examples are:
- The establishment of Amul is also known as White Revolution. The White Revolution of India inspired the notable Indian film-maker Shyam Benegal to base his film Manthan (1976) on it. The film itself was financed by over five lakh rural farmers in Gujarat who contributed Rs 2 each to the film’s budget. Upon its release, these same farmers went in truckloads to watch ‘their’ film, making it a commercial success. The film was chosen for the 1977 National Film Award for Best Feature Film in Hindi.
- Bob & Veronica Ride Again was a 2007 UK music album which was made possible after crowdfunding generated £20,000.
Most recently, I successfully raised $3478 from 57 backrs (an alternative term used for crowdfunders) for an Android App I created. The App is known as Valuation App and performs financial analysis. The minimum backing required for participation was US $11 and a return of 54% was fixed.
Crowdfunding, Small Businesses and Wantraprenuers
Small businesses and Wantraprenuers (wannabe entrepreneurs) are always in need of funding and are constantly looking for investors. Wantraprenuers are individuals with an idea they want to turn into a business but do not have the resources to do so. Small businesses are usually small groups of people who are either in the initial stages of setting up the business or need funding to start a new project. The general trend for such entities is to search for investors who can invest large amounts of money. Sometimes these entities look for a small number of sophisticated investors who can invest relatively large amounts of money in order to finance their project.
Crowdfunding helps small businesses and wantraprenuers in a number of ways. An investor needs a lot of convincing before he/she decides to make a large investment, and that is why most small projects suffer from lack of available funding. It is a general perception among the business community that the small businessman is helped out by friends, family and fools, who are willing to take a risk. The element of risk is largely reduced through crowdfunding, because the investment required of each funder is small which reduces the risks, while keeping the rewards similar.
By asking a very large crowd for small amounts of money, a small business also raises awareness about itself and about its product, and can gain valuable feedback from the crowdfunders who are also potential customers of the product/service in question. The funders also have a vested interest in the success of the campaign; therefore, they ask their friends and acquaintances to participate in the funding as well, mostly through online social networks. In this way, the campaign and the business itself gain word of mouth marketing. In this way, crowdfunding can help a previously unknown business go viral.
It was discussed earlier in the article that most crowdfunding activity is performed by artists and other professionals from the entertainment industry; however, individuals from several other fields are also rapidly catching up with the artists when it comes to crowdfunding. Several Apps for smartphones have been successfully completed with the help of crowdfunding; the reward being a free version or a relatively low priced version of the product. Platforms such as appbackr go even further, by offering guaranteed returns on investments, once the app sells in app stores. The catch here is that it is uncertain as to when the returns can be collected, since they are determined by app sales. Some apps may sell very quickly, some might take years to get you the promised return, and some may not sell at all.
On 28th June 2012, Forbes published an article describing that crowdfunding is saving the US economy. It was discussed in detail in the article that small businesses account for about 65% of jobs in the US, and the small businesses are in constant need of funding in order to stay afloat in today’s economy. The fact that most startups find the first year in business the hardest to survive also emphasizes the need for crowdfunding. All over the globe, especially in Canada, Australia and UK, several individuals and organizations have successfully utilized crowdfunding in order to not only survive the current economy but to turn a profit and to give their funders a value added return.
Benefits of Crowdfunding
Several benefits of crowdfunding have been discussed in the previous sections, so in this section let’s cut right to the chase and present points in the most compact form. Through crowdfunding, individuals and organizations can:
- Reach out to a wide range of people all over the world.
- Raise large amounts of funds while simultaneously creating their own brand identity.
- Gain valuable feedback on the product/service/project they are raising the funds for.
- Turn funders into future customers.
- Stop depending on large investment from investors and thus enjoy minimum interference from the investors.
- Increase public awareness about their products and gain free word of mouth marketing on social media.
Jumpstart Our Business Startups (JOBS) passed in April 2012 helps ease online security regulations in order to encourage crowdfunding and fundraising for small businesses and entrepreneurs. There are many aspects to the act, but the most relevant to crowdfunding is that not all fundraising efforts have to be registered with the SEC now. The act received overwhelming support in the congress and is being viewed by the technology gurus as a step in the right direction.
With the JOBS Act now implemented, it has become much easier for individuals and small businesses to start their own direct or indirect crowdfunding campaigns.
Emerging Economies, Under-developed Countries and Crowdfunding
The fast emerging economies such as India and China are already using crowdfunding when it comes to the entertainment sector. However, small businesses seem to be catching up but the trend has not yet become popular. It is understandable that crowdfunding is not yet popular in the under-developed countries, where a large chunk of the population does not have access to the internet. In India and China, along with other emerging economies, where a sizeable population has access to internet and online banking, crowdfunding can be phenomenal in creating jobs.
As stated earlier, crowdfunding can help small businesses to stay afloat, and small businesses in turn create jobs and help the economy. If crowdfunding is promoted in under-developed countries with the basic infrastructure to support it, several new businesses can be helped and several jobs can be created. Not to mention, the crowdfunders can also get a valuable return on their investment. In this regard, crowdfunding websites similar to Kickstarter or Crowdfunder can be established for the local market. Such a website can be established with the minimal of investments and will have access to a very large untapped pool of entrepreneurs and funders.
For an individual about to start a crowdfunding campaign, the importance of infrastructure is of immense importance when it comes to the developing countries. The internet connection can be very slow or very expensive, and the availability of volunteers to interact with funders through social media is also a big issue. Although the internet connection issue is relatively easy to resolve, the lack of volunteers presents a great challenge. Most people willing to volunteer in such ventures in the developing countries lack relevant skills. Those who are skilled prefer to utilize their skills in generating an income and are too busy to volunteer. The skilled workers can also be attracted to work on crowdfunding projects, but they have to be offered some incentives. The emerging economies are already on their way when it comes to increased crowdfunding activity, whereas the under-developed countries need the basic resources and infrastructure before wantraprenuers there can run successful crowdfunding projects.