Crowdfunding

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Crowdfunding is a means to building financial support for a project or product from diverse sources. [1]. Crowdfunding is a form of Crowdsourcing, applied to finance. Instead of venture capital, institutions, or direct philanthropy, an interest community is called on to support the project in a distributed, generative fashion.


Crowdfunding is generally characterized by [2]:

1. An Invitation to participate in enabling a novel creative project

2. A Campaign to engage a substantial community in the effort

3. A Celebration of accomplishment, usually involving a return of gifts/value to participants


Contents

Definitions

1. From Wikipedia http://en.wikipedia.org/wiki/Crowdfunding

"Crowdfunding describes the collective cooperation, attention and trust by people who network and pool their money together, usually via the Internet, in order to support efforts initiated by other people or organizations."


2. From http://www.chaoticripple.com/2011/crowdfunding-isnt-about-money

"Crowdfunding is a community-engagement process between an individual or organization seeking money to create something new and a crowd of supporters who want to participate in the effort in a meaningful way."


3. From http://www.crowdsourcing.org/community/crowdfunding/7

"Crowdfunding is an approach to raising capital for new projects and businesses by soliciting contributions from a large number of stakeholders following three types of crowdfunding models: (1) Donations, Philanthropy and Sponsorship where there is no expected financial return, (2) Lending and (3) Investment in exchange for equity, profit or revenue sharing."


Typology

Three ways organisations or people seem to get funded. |via Quora

  1. Pledging or donating (like Kickstarter)
  2. Lending (like Kiva)
  3. Investing (Like ASSOB)

Ross Dawson writes:

"There are two types of crowdfunding that are fundamentally different: crowdfunding for equity, which is covered in detail in the following chapter, and crowdfunding in which funders receive no equity. Equity crowdfunding is becoming increasingly viable as models are developed that conform with the current strict securities regulations in developed countries, and legislation appears in some cases to be relaxing. However in most cases references to crowdfunding are to the ‘traditional’ model in which no equity is granted to those who fund projects." [3]


DIYs (do it yourself) Crowdfunding

An alternative to the standard crowdfunding approach is to create your own campaign with various online tools and webspaces, promoting to your target audience with social media and other outreach.

The process involves:

  1. Creating a web presence outlining your project or proposal, specifying requests and any offers or enticements for backers.
  2. Setting up an account with payment processor such as PayPal or Amazon.
  3. Promoting to potential backers via social hubs like Facebook, Twitter and LinkedIn.
  4. Tracking progress, making campaign adjustments, processing contributions and fulfilling promises if successful.

This method is somewhat more involved, and more dependent on your own marketing and networking ability. DIY crowdfunders will want to maintain a compelling and concurrent web presence that offers simple and secure methods for contribution. An example of DIY platform is CrowdFunding Bank, which allows you to do the crowdfunding campaign on your own and directly receive the funding into personal PayPal account.

The advantages are:

  1. open-ended customization
  2. adaptability during campaign
  3. avoidance of platform fees (often %5-%10 of contributions)
  4. draw and retain traffic directly to your project webspace


Characteristics

Incentives

"Funders are usually offered incentives, such as a pre-release DVD or CD, a name on credits, or a meeting with the artists. In some cases the crowdfunding process is effectively a pre-sale of products that have not yet been created. More often funders are motivated more by contributing to something worthwhile rather than simply purchasing a product.

...

Beyond the satisfaction of having funded a worthwhile endeavor, many funders look for more tangible outcomes, even if they are just personal evidence of their contributions. For creative projects this will usually include copies of any work produced, often in special editions or received before others. Another significant incentive for funders is public recognition in various formats." [4]


Thresholds

"Most crowdfunding platforms require a pre-specified minimum funding level to be reached before the contributions are made. That funding amount is supposed to be sufficient to allow the project to happen, so people do not pay unless the project is fully funded and can proceed." [5]


Platforms

'However there are now a wide variety of crowdfunding platforms that not only facilitate the logistics of accepting contributions from existing networks of contacts, but also give access to broader pools of people who are interested in participating in worthy projects. The platforms also allow funders to give feedback and conduct a dialogue with the project originators." [6]


Status

BY BOB GOURLEY:

"Within the span of a three month period (March – May 2012), the largest crowdfunding sites including Kickstarter, Indiegogo, Grow VC, and Rockethub doubled their daily traffic and donation volumes. Between 2008 and 2011, Kickstarter’s issuers raised over $200 million in sales. In 2012, the site raised an additional $145 million. On Indiegogo, another popular crowdfunding site, campaigns raised 20% more money in 2012 than they did in 2011. Substantial growth was also seen in the debt crowdfuding industry. Between 2007 and 2011, the LendingClub (the largest U.S. peer-to-peer lender) facilitated the lending of more than $1 billion dollars. In 2012, the LendingClub grew by an additional $1 billion." (http://www.sys-con.com/node/2518811)


2013 Survey

1. Carl Esposti:

"After surveying more than 350 active crowdfunding platforms ... research firm Massolution has identified five major crowdfunding developments for 2013 and beyond.

1. Niche platforms

As crowdfunding platforms try to benefit from market differentiation, niche-, industry-, and sector-specific platforms are emerging.


2. Locavesting

In her 2011 book, Locavesting, business and finance journalist Amy Cortese describes how “a revolution in local investing” is emerging and that crowfunding is boosting it. This year, we are going to see increased momentum in this revolution because many new crowdfunding platforms will actually specialize in locavesting ... at least four states – Louisiana, North Carolina, Georgia and Kansas – have taken the initiative to allow crowdfunding for business loans. Crowdfunding platform Rebirth Financial is specializing in locavesting and offers intrastate, lending-based crowdfunding.


3. Enterprise crowdfunding

Large enterprises and associations have begun to look into crowdfunding and how this tool carries new potential for their companies, including raising social profiles, market testing, and spin-ins of entrepreneurial ventures. The perceived benefit is not the additional funding itself, but the democratization of specific decisions that would otherwise be made internally in the company.


4. Crowdfunding economic development

Major development banks and similar institutions — including The World Bank and The Inter-American Development Bank — are seeking to leverage crowdfunding for economic development. Crowdfunding’s social profile and its strong connection to micro-finance are the main drivers ... The Multilateral Investment Fund (MIF) of the Inter-American Development Bank is currently exploring the potential of crowdfunding in Latin America, and how crowdfunding can be used to improve small businesses and bring financing to entrepreneurs who have less access to it.


5. LIVE crowdfunding

The final trend that we see emerging in the crowdfunding space are launch-party events at the initiation of campaigns or LIVE crowdfunding expos. Besides creating media attention and offering a great marketing opportunity, LIVE Crowdfunding taps into an investor need that is hard to come by through the web: exclusivity." (http://venturebeat.com/2013/05/22/5-ways-the-booming-crowdsourcing-ecosystem-is-changing-in-2013/)


2. Glogal Crowdfunding Report, http://www.crowdvalley.com/2013/10/17/crowd-valley-releases-global-crowdfunding-report/

History

From the Wikipedia:

"In 1997, fans underwrote an entire U.S. tour for the British rock group Marillion, raising $60,000 in donations by means of a fan-based internet campaign.[citation needed] The idea was conceived and managed by fans without any involvement by the band, although Marillion has since used this method with great success as a way to fund the recording and marketing of its albums[citation needed] Anoraknophobia, Marbles, and Happiness Is the Road.

The United States based company ArtistShare (2000/2001) is documented as being the first crowdfunding website for music followed later by sites such as Sellaband (2006), IndieGoGo (2008), Pledge Music (2009), Kickstarter (2009), RocketHub (2009), Rock The Post (2011) and in the UK Sponsume (2010) and PleaseFund.Us (2011).

Franny Armstrong was a pioneer of crowdfunding in the production of the eco-movie The Age of Stupid starring Pete Postlethwaite. The film was crowd-funded by a £450,000 budget being raised by selling "shares" to 223 individuals and groups who donated between £500 and £35,000.

Morton Valence are an early example of a relatively obscure band to independently enter into crowd funding without using a third party website such as sellaband. In 2007 Franny Armstrong discussed her project with bandleader Robert "Hacker" Jessett who adapted it to work for the independent music business raising £20 000 to record and promote the concept album Bob & Veronica Ride Again.

The Professional Contractors Group, a trade association for freelancer workers in the UK, was founded on the internet in 1999 when Andy White put out a call for 2,000 contractors to pledge £50 to raise £100,000 so he could start the organisation. 5 days later 2002 people had pledged the money and so the organisation was born. Today it has over 14,000 members and is a thriving trade association.

Crowd funding's earliest known citation was by Michael Sullivan in fundavlog on August 12, 2006." (http://en.wikipedia.org/wiki/Crowd_funding)

Discussion

According to Ross Dawson in Getting Results from Crowds:

  • "Crowdfunding works best for well-developed creative projects

from which funders can receive tangible benefits.

  • The most successful crowdfunding projects showcase both the

qualities of the incentive and the passion and enthusiasm of those behind the project.

  • The crowdfunding process is an opportunity to engage with the

crowd to receive feedback and create a community of potential customers and evangelists.

  • Crowdfunding can be applied to a variety of endeavors including

philanthropic funding." (p. 117)


Crowdfunding and the Law

Janelle Orsi, SELC:

“Offering any kind of investment opportunity is an activity that is highly regulated by both state and federal law known as securities law. These laws were passed early in the last century to protect investors from slick pitch artists who traveled across the country selling worthless investments. Kansas adopted the first securities law in 1911 to “keep ‘Kansas money in Kansas’ and help local farmers and small businesses rather than enriching ‘New York Stock Exchange speculators and gamblers.’” Ironically, these laws now make it almost impossible to invest in small businesses in our communities and pretty much compel us to invest in the New York Stock Exchange. In the name of protecting investors, securities laws now make it very difficult to raise money with crowdfunding. The basics of these laws is that before any investment opportunity can be offered, the person making the offering must file extensive disclosure documents with the federal government, as well as any state in which the offering will be made. There are some exemptions to this general rule, but even the exemptions take securities law expertise to comply with. The result is that anyone offering an investment opportunity may have to spend thousands in legal fees and filing fees before even being able to mention it to any potential funders. Generally, if you bring on a large, wealthy investor, the legal compliance required is minimal because the law assumes that these people and companies need much less protection (they are defined as “accredited” investors under the securities law). The moment you want to offer an investment opportunity to the public and to non-wealthy investors, the legal requirements become far more onerous. Failure to comply with these requirements can, at a minimum, result in having to return all your investors’ money. At worst, there could be civil and even criminal penalties.” (http://www.shareable.net/blog/crowdfunding-and-the-law)


Crowdfunding in the context of VC / Angel and other investment funding

Some stats from the U.S., by Victoria Silchenko:

"A Global Entrepreneurship Monitor (GEM) study revealed that out of the $51 billion invested in start-ups by individuals in 2010, only $9.4 billion was committed by angel investors (formal investors) while the bulk of capital, $41.6 billion (81%), came from friends and family. What about VCs? Let's look at the data from the National Venture Capital Association (NVCA): in 2010, venture capitalists invested approximately $22 billion into about 2,750 companies, 36% of which received funding for the first time. Now let's compare the numbers: in 2010 we had $41.6 billion coming from friends and family, aka "informal" investors, fearlessly backing up start-ups and only $22 billion from the VCs committing to both: start-ups and established business. Are you thinking what I'm thinking?

More recent data from GEM confirms that in 2011, 4.8% of the U.S. population personally provided funds for new businesses while only 1% of the population was represented by formal or accredited investors (must have an annual income of at least $200K or over $1 million in liquid net worth) along with venture capitalists. Alas, the last were not much of a help to the majority of entrepreneurs - 95% of business plans received by the accredited investors and VCs were rejected.

From my frequent talks with VCs, I've collected even more astonishing numbers - on average a VC reviews 2,000 business plans annually while choosing to invest in just 3-5 ventures per year. So, your probability of getting funded by a VC is 0.2%. On the flip side, one of the VCs told me that he has to raise capital himself most of the time and is often sad to let the company go - moreover, he wouldn't be surprised to find out that his "rejected portfolio" would perform better than the acquired one. What? Does it mean that we might miss the next Mark Zuckerberg? And who holds the cash anyway - money that might have been invested in the emerging ventures otherwise?

The enlightening answer has arrived from the Federal Reserve. It turns out that large U.S. corporations currently hold about $1.73tn (50% more than they held in 2007) and banks keep in their reserves an estimated $1.5tn in excess. Realistically speaking, can we expect such cash hoarding to be unleashed any time soon with a goal of rescuing small businesses under the premise "too small to fail because nobody will notice anyway"? You get the point.

Needless to say, entrepreneurs in the U.S. are waiting with their hands up for the SEC to arrive with new solicitation and general legislation rules that would allow them selling shares over the Internet utilizing the equity- based crowdfunding model. Yet, some of them have already employed an altruistic or reward-based crowdfunding model which is operational today. If you are a small business owner or have a creative project, chances are you are familiar with Kickstarter , IndieGoGo or GoFundMe - crowdfunding platforms with the investment proposals spanning from film makers to innovators offering non-financial incentives for micro-sponsors. Furthermore, last week Lockitron released a crowdfunding software under an open source license and launched Selfstarter - a ground-breaking platform which would allow inventors to set up their own crowdfunding campaigns.

Interestingly, the long awaited crowdfunding model where micro-investors take an equity part in the company, has been already operational in the UK for over two years, in Australia for seven, and recently was legalized in Italy by the Monti government. My Italian friend commented after that legislation: "I must say that this is a time I am proud to be an Italian!"

Overall, according to Crowdsoursing.org , the company that does an admirable job tracking the industry numbers and trends, the crowdfunding platforms raised $1.5 billion in 2011 - still a tiny number in global terms but the growth is impressive: 72% from $854 million in 2010 and almost a triple jump from the $530 million raised in 2009. The study forecasts further growth which is expected to be almost doubled this year reaching $2.8 billion globally." (http://www.huffingtonpost.com/victoria-silchenko/why-crowdfunding-is-the-n_b_1990230.html)


Examples

Many examples below are from http://get-paid-to-ppc.blogspot.com/2007/01/types-of-crowdfunded-projects.html

Examples: Music

Sellaband

Sellaband has the following model:

"The site basically gives you a MySpace type page to exhibit your mp3s, but instead of friends, you get ‘believers.’ These disciples of your rock scripture invest in your music at $10 increments until you’ve raised $50,000. Then, the magic happens at the studio, your faithful get a copy of your album, and the songs are posted online for free. For every download, you and your financiers, the original ‘believers,’ share in ad revenue. (More details here.)

By deferring the cost and talent of scouting to a large population of music lovers, SellaBand puts powerful marketing and production tools into the hands of those with a personal interest in the music. Potentially, this is a perfect service for bedroom musicians who think they have the next big thing but have no exposure. It’s one of several examples of crowdfunding." (http://newassignment.net/blog/keith_axline/dec2006/06/music_makes_a_ca)

I Am Verity

i am verity: "Fans can become a "future owner today" by helping to raise $80,000 for recording costs and charity benefits. In essence, the artist is asking people to buy an album before it exists... so that it can exist. Also, 5.3% of money earned will be used to help others succeed (vague). Another 5.3% of everything earned goes to "People Opposing Woman Abuse's" work in South Africa. Once the target of 5000 albums is sold, The hope is to increase the percentage put towards these charities and make a difference in South Africa." [7]

More Examples


Examples: Cinema, Video, Vlogging

A Swarm Of Angels

A Swarm Of Angels is a peer funded film project witht the following model:

"A Swarm of Angels is about making a £1 million movie and giving it away to one million people in one year. By using the Internet to gather together 50,000 people willing to pay £25 to join an exclusive global online community–The Swarm–the project’s ambition is to make the world’s first Internet-funded, crewed and distributed feature film."

See also: ASOA Faq page, Open Business blog entry and discussion

Have Money Will Vlog

Have Money Will Vlog "is a project that involves a group of volunteers that act as advocates for vlog proposals. The advocates promote projects they believe in to potential donors, whether they are friends and family or reaching out to those who subscribe to their blogs and related mailing lists etc. It's a very intimate affair that relies on Crowdfunding to reach the pledge drive's goals." [8]

Fundavlog

"fundavlog is an experimental project that will attempt to sustain and/or incubate videoblog related projects and events by growing a Crowdfunded Network offering configurable 'payment pages' with simple funding functionality. Reciprocity and Transparency are the core basis in order to build a trusted attention network of people who are interested in the videoblog culture. Users deposit money into the fundavlog bank which they then can use to fund various types of entries submited by other users." [9]


Examples: Business

Laragh Finance: "A company that raises funding for businesses using the crowd funding concept, private placements are no longer only accessible for high net worth individuals and big institutions. A large group of small investors can together come up with the total capital a company need to execute its business plans." [10]

Crowdcube.com is the worlds first crowdfunding platform enabling startup companies to raise funding by offering real equity. Uniquely, Investors can invest very small amounts of money (minimum £10) allowing the average Joe to build their own investment portfolio. See also: Crowdfunding definition, examples and latest news

PeerBackers peerbackers is a new way to fund entrepreneurs. It is an online funding platform that allows business owners to raise capital from their “peers”—in small increments—in exchange for tangible rewards to those who contribute.

Seedups Seedups is a new way to fund entrepreneurs, using a reverse auction procedure. The crowd of investors get a real equity stake for their investment.

IPO Village First of its kind, equity crowdfunding platform for upcoming Nasdaq IPOs. Utilizing a crowdfunding platform to give small companies the ability to go public without the use of an underwriter syndicate.

Directory


Funding Typology

  1. Crowdfunding-Based Startup Investments‎
  2. Crowdfunding-Based Project Support
  3. Crowdfunding-Based P2P Lending
  4. Crowdfunding-Based Microcredit
  5. Crowdfunding-Based Donations


International

(could mean "U.S.")

1. Compiled by Venessa Miemis [11]:


   * crowdfunding - creative


- kickstarter http://www.kickstarter.com/ - Indiegogo http://www.indiegogo.com/ - crowdfunder http://www.crowdfunder.co.uk/ - peerbackers http://peerbackers.com/ - chipin http://www.chipin.com/ - fundable http://www.fundable.com/ - citizen effect http://www.citizeneffect.org/index - revenue trades http://www.revolutiontrades.com/ - rockethub http://www.rockethub.com/ - sonicangel http://www.sonicangel.com/ - spot.us - startnext http://www.startnext.de/ - ulule http://www.ulule.com/ - cofundos http://www.cofundos.org/ - buzzbnk http://www.buzzbank.org/ - biracy http://www.biracy.com/

   * crowdfunding - open business investment


- 40billion http://www.40billion.com/ - appbackr http://www.appbackr.com/ - capangel http://www.capangel.com/ - cofundit http://www.cofundit.com/ - crowdcube http://www.crowdcube.com/ - crowdfund http://www.crowdfunding.co.za/ - digital garage http://digitalgarage.co.za/ - globeforum http://www.globeforum.com/ - growvc http://www.growvc.com/main/ - innovatrs http://innovatrs.com/ - investiere http://www.investiere.ch/ - podium ventures http://podiumfunds.com/ - profounder http://www.profounder.com/ - raisecapital http://www.raisecapital.com/home.php - seedups http://www.seedups.com/ - seedmatch http://www.seedmatch.de/ - trampoline http://crowdfunding.trampolinesystems.com/ - vencorps http://www.vencorps.com/ - venture bonsai http://www.venturebonsai.com/ - wealthforge http://www.wealthforgeonline.com/ - wiseed http://www.wiseed.fr/wicket/web/accueil - FriendsClear http://www.friendsclear.com

(http://www.quora.com/Crowdfunding/What-are-some-great-crowdfunding-websites)


2. Compiled by Suresh Fernando:

(Suresh has a table with the following info: *Organization* *URL* *Specific Vertical Focus* *Online Community and/or collaboration[1] <#1312a50fbeb8a72d__ftn1>* *Support Recurring* *Funding* *Support Pooling of investor funds[2] <#1312a50fbeb8a72d__ftn2>* *Support Pooling of Investee Projects* *Develop Funder – Fundee Partnership* *Support Micropayments*)

Netherlands

Compiled by Ronald Kleverlaan (in Quora):

crowdfunding - creative

   * www.voordekunst.nl - Art
   * www.1procentclub.nl - Development Aid
   * www.pifworld.com - Development Aid
   * www.10pages.com - Books
   * Cinecrowd.nl - Movies
   * Nieuwspost.nl - Research journalism


crowdfunding - open business investment

   * www.crowdaboutnow.com
   * www.symbid.nl

(http://www.quora.com/l/d9ff4wwP8e)


Spain

Starting from Spain...

Goteo

see also Crowdfunding as the trojan horse of the commons

Johannes 24.8.11

More Information

  1. More information in the Wikipedia article at http://en.wikipedia.org/wiki/Crowdfunding
  2. Overview article at http://get-paid-to-ppc.blogspot.com/2007/01/types-of-crowdfunded-projects.html
  3. Bands funded by their fans
  4. Equity Crowdfunding Websites
  5. Lambert, T., Schwienbacher, A. (2010) An Empirical Analysis of Crowdfunding, Working Paper available on SSRN.com, 23pp.

Specific forms of crowdfunding:

  1. Equities-Based Crowdfunding, example ASSOB
  2. Philanthropic Crowdfunding


See also:

  1. Assurance Contract
  2. Dominant Assurance Contract
  3. Reverse Bounty


See also:

  1. The entries on P2P Banking, Crowdsourcing
  2. See also: Open Music Business Models, Open Film Business Models