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7/28/2019 Intro to Crowd Funding
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AN INTRODUCTION TOCROWDFUNDING
The late 19th century saw the creation o one o the worlds most recognisable landmarks
with the git o the Statue o Liberty by the French to the US. While the French paid or the
construction and shipping o the statue it was down to the US to und the base upon which it
would stand. With the statue ready to leave France, the Americans were still well short o the
$300,000
1
needed to build the base and erect the statue. Running short o time the AmericanCommittee (responsible or raising the unds) teamed up with newspaper owner Joseph
Pulitzer to launch a campaign to invite citizens to donate even small amounts to help in the
unding o the pedestal, oering donors miniature replicas o the statue in return. This 19th
century crowdunding campaign raised $100,000 in just fve months, contributed to one o
the most popular attractions in the world and illustrated the fnancing power o a large crowd
when tapped or unding.
While the American Committee were lucky to have Mr Pulitzer and his paper to publicise their
plea or donations, others wishing to access so many people would have had no such help.
This, however, has changed in recent years with the rise o social media and the new ease with
which communities can orm and interact online.
Annual growth in the number of crowdfunding platforms worldwide
Growth
2007 2008 2009 2010 2012 (Est.)2011
54% 60%47%45%38%
Source:www.crowdsourcing.org
7/28/2019 Intro to Crowd Funding
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2 / An IntroductIon to crowdfundIng
With this new opportunity came the need to acilitate the transer o unds rom those who
were looking to donate or invest to those in need o the capital. Crowdunding platorms are
online intermediaries that acilitate this process, whose numbers have been growing rapidly in
recent years. Recent research estimates that there were 453 platorms operating worldwide
by the end o 2011 and numbers growing at a rate o 63 per cent CAGR. 2 The amount o unds
committed through the model has enjoyed similar growth with $1.5 billion raised or projectsand businesses in 2011. Over 80 per cent o this capital has been raised in the US with Europe
having slower growth but leading in pioneering new applications o the model.
The platorms operate by allowing those seeking fnance to make a pitch on the site outlining
how much money they need, what they need it or and what, i anything, you get in return or
contributing. Potential unders can then view pitches on the platorm, interact with both those
looking or fnance and other potential unders and then decide whether or not they want to
back the campaign. The majority o platorms operate the allornothing model where, i the
target amount is not raised within a given timerame, contributions are returned to unders and
no fnancing goes ahead.
Crowdunding acilitates the raising o capital or a variety o purposes, using numerous
variations o the model. Below is a typology o how the operators in the market can potentially
be segregated. The majority o platorms can be categorised under these our types, but there
are several variations, such as hybrid models and those platorms that defne themselves in a
sectoral vertical rather than by the type o fnance they provide.
Form of contribution Form of return Motivation of funder
Donation Donation Intangible benefts. Intrinsic and social
Crowdfunding motivation.
Reward Donation/ Rewards but also Combination o intrinsic
Crowdfunding Prepurchase intangible benefts. and social motivation
and desire or reward.
Crowdfunded Loan Repayment o loan Combination o intrinsic,
Lending with interest. Some social and fnancial
socially motivated motivation.
lending is interest ree.
Equity Investment Return on investment Combination o intrinsic,Crowdfunding in time i the business social and fnancial
does well. Rewards motivation.
also oered sometimes.
Intangible benefts
another actor or
many investors.
Donation Model. The donation model o crowdunding is a means or charities, or those who
raise money or social or charitable projects, to gather a community online and to enable
them to donate to a project. While most established charities acilitate this through their
own website, crowdunding is popular or small organisations and people raising money or
personal or specifc charitable causes. Popular sites include Crowdrise and Causes.
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3 / An IntroductIon to crowdfundIng
Reward Model. The most popular orm o crowdunding to date has been the reward model
which has grown signifcantly in the unding o creative, social and entrepreneurial projects.
The model allows people to contribute to projects and receive nonfnancial rewards in return,
usually operating a tiered system where the more you donate the better the reward you
receive. The model oten closely resembles philanthropy with the donation ar exceeding the
monetary value o the reward or the reward costing the undraiser little, such as experience orrecognitionrelated rewards. For some projects the model is similar to a presale agreement.
In these cases entrepreneurs or artists crowdund the production cost o their record, movie,
game or product and allow the donors to be the frst recipients once the production is
complete. Popular platorms operating the reward model are Kickstarter and Indiegogo in the
US and Peopleund.it in the UK.
Lending Model. Crowdunded lending is largely an evolution o the peertopeer model o
lending, pioneered by frms such as Lendingclub and Zopa. Projects or businesses seeking
debt apply through the platorm uploading their pitch, with members o the crowd taking
small chunks o the overall loan. Some platorms ocused on social causes oer interestree
loans such as microlending site Kiva. Others operate more as an investment, where interestrates are decided either by those seeking the loan or using a market or loan parts, such as that
used by UK platorm FundingCircle.
Investment Model. The fnal type is the application o crowdunding to investing or equity, or
proft/revenue sharing in businesses or projects. This orm o the model has been the slowest
to grow due to regulatory restrictions that relate to this type o activity. Some European
platorms have been pioneers o the equity crowdunding model, allowing anyone to take a
small stake in an unlisted or private business through crowdunding. The most popular sites in
oering this model are CrowdCube in the UK and Symbid in the Netherlands. Others such as
Quirky oer a revenue or proftsharing model allowing you to capitalise on the success o the
projects you back.
While most platorms ft relatively neatly within one o the categories above, many also do
not. Examples o this are BuzzBnk a social venture ocused platorm that oers both the
reward model and the lending model. BankToTheFuture aims to oer a stream o unding or
businesses starting with rewardbased and equity crowdunding and then loans once they
start generating revenue. Other sites target specifc vertical niches such as Mobcaster or TV
shows, 8bitunding or video games and UnBound or book publishing.
In the coming months Nesta aims to shed more light on this new model o fnance with our
pieces o research looking at its application in some dierent areas:
1. Crowdfunded equity investing
This piece looks at the potential o crowdunding to provide risk capital to businesses. We
examine how the model works and investigate whether it provides the sufcient benefts and
protections or both businesses and investors. Regulation, a barrier to the growth o the model,
is examined as are other policy issues such as tax incentives. The report outlines the issues
surrounding the model, drawing on interviews with key stakeholders in the feld.
2. An analysis of crowdfunded lending for business
This research empirically examines a particular type o crowdunding, the business lending
model, which is growing ast in the UK. For the purpose o this study, Nesta is working closely
with FundingCircle, a UKbased debtcrowdunding platorm to collect data rom both those
7/28/2019 Intro to Crowd Funding
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4 / An IntroductIon to crowdfundIng
who lend and those who borrow through their platorm. The study provides key insights on
both the motivations and characteristics o those lending and borrowing through the model
and examines the growth potential o the model.
3. Crowdfunding for social good
This research takes a closer look at the role o the increasing number o platorms or social
giving that are now being used in the UK. We will review the recent development o platorms
in this space, and investigate the variety o ways that donors can give to and support causes
through these platorms. Much o the new activity in crowdunding or social good goes
beyond oneo and oneway fnancial donations to include the giving and loaning o money,
time and resources. The report will highlight the key trends and challenges or this emerging
sector including how existing unding bodies and social projects can make the most o the new
opportunities provided by these platorms.
4. Crowdfunding in the creative industries
Crowdunding platorms can connect cashstarved creative entrepreneurs with audiences
looking to und creative projects because they are passionate about their substance, rather
than seeking to generate a fnancial return rom them, as well as with investors oering capital
on better terms than traditional sources o fnance or the sector, such as banks or publishers.
Kickstarter, the most successul creative crowdunding platorm, has already generated
pledges above $230 million, and unded over 23,000 creative projects.
Many policyrelevant questions about creative crowdunding remain to be addressed such
as its potential role as a driver o innovation and competition in creative industries dominated
by riskadverse gatekeepers, or its position within the wider fnancing landscape or the
sector. Creative entrepreneurs would beneft rom robust knowledge about which project
characteristics and crowdunding practices are more conducive to success. Nesta is currentlyexploring research opportunities in this emerging area.
ENDNOTES
1.PulitzercrowdfundedtheStatueofLiberty.See:http://dailycrowdsource.com/20resources/projects/169pulitzercrowdfundedthestatueofliberty
2.www.crowdsourcing.org
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