On The Rise Of Crowdfunding

crowdfunding

In early 2012 Eric Migicovsky and his team at Pebble Technologies, a Silicon Valley hardware start-up, was riding on a wave of success. Their success came from a successful crowdfunded project, Pebble Smartwatch. This project of theirs was, and still remains, one of the most successful crowdfunded projects ever. It received a  total funding of over 10 million dollars on the crowdfunding platform Kickstarter. However, I am not going to talk about the success of the Pebble smartwatch, instead I am going to share with you the success of crowdfunding.

Wikipedia is an online encyclopedia born out of the contributions from hundreds of thousands of volunteers making contributions to numerous articles, which is called crowdsourcing. When this concept involves money, it is called crowdfunding. Crowdfunding enables unaccredited individuals to back a wide array of projects ranging from software and product design to creative projects such as financing for films and also contributions to philanthropic initiatives. Crowdfunding has evolved with the internet, erasing the barriers for such transactions. A more subtle development that has led to the boom of crowdfunding could be the elimination of the stigma associated with asking for funds online from virtual strangers.

Even the numbers strongly back crowdsourcing. An industry report by research firm Massolution estimates that, as of April 2012, there were 452 crowdfunding platforms (CFP), such as Kickstarter which is active worldwide; and projections suggests that there were more than 530 CFPs by the end of 2012. These CFPs together raised a total of 1.5 billion dollars in 2011 and estimates suggests that this amount is set to double to 2.8 billion dollars in 2013.

Crowdfunding should neither be considered similar to a tip-jar, nor should it be mistaken for the kind of donation requests that Wikipedia makes to its many users from time to time. This approach of donation has worked for only a handful of ventures; also it has worked only in conjunction with other sources of revenue. “It’s not a tip jar, and that’s what makes it sustainable,” says Perry Chen, the co-founder of Kickstarter.

Crowdfunding is different in the sense that it works by raising money for a well-defined project within a specified time limit and with a goal of raising a particular minimum sum. Donors usually get some kind of reward or recognition (a mention in a film’s credits, for example), but they do not have any rights in the resulting work.

Take Kickstarter for example; if the target of the project is met, then the funds are transferred from the backers to its recipients. If the target isn’t met no funds are collected. And from all of the successful projects, the CFPs and credit-card processing companies in the United States of America take about a nine percent cut from the total amount.

Crowdfunding has also been touted to be the way to attain a large share of the equity capital needed for start-ups. The report by Massolution indicates that the equity based crowdfunding segment saw the largest growth in the years leading to 2012. The report specifies that, the start-ups that can most quickly and efficiently attract these funds are those that offer digital goods like software applications, games, films, and literature.

Crowdfunding for equity though does have its sceptics, Daniel Isenberg, an early investor and Professor of Entrepreneurship Practice, in his HBR blog post cites several reasons that might render crowdfunding as impractical for equity capital. Most notably, he labels purchasing equity (stock) in early stage ventures too complex to standardize, a method most CFP’s follow. He also mentions, drawing from his background in behavioural economics and psychology, that crowds tend to display intelligent behaviour only under circumstances and that these crowds are plainly stupid.

The crowdfunding ecosystem itself has given rise to a handful of agents and start-ups that promise to deliver a successful campaign. The Wall Street Journal, reported on a 34-year-old part-time filmmaker from Waldoboro, Maine; Lucas McNelly as part of a band of crowdfunding consultants. He handles about 10 campaigns at once and provides services ranging from advice on advertising to running a campaign’s day-to-day operations. He gets a cut of five percent to 13 percent from projects that attain there goals. These campaigners rely on creating a buzz through their social networks.

Mr. McNelly has gotten kicked off Twitter at least once while promoting a client’s campaign. After he sent more than 100 tweets in an hour during a final push for a client and the site stopped him from sending more for a while. Campaigners promote themselves on sites like Facebook, Twitter, Instagram and Tumblr, but those with little social-media presence can try to buy buzz from a number of new services. One of them, CrowdFund Promotion, offers customers access to 21 Twitter accounts with 90,000 followers. For 74 dollars, customers are also promised at least 1,500 retweets. Campaigners stay mum about employing such services so that their traffic doesn’t look phony. “They don’t want to admit they used us,” says the company founder and CEO, Matt Morris.

Crowdfunding has stopped being considered a fad, as evidence mounts in its favour and success can be summed up in part in what Carl Esposti, CEO of Massolution says “There is an immense desire to want to support the aspirations of entrepreneurs and people who are pursuing causes.”

Sheshera Mysore

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