Intro to Crowd Funding

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

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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


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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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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


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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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Intro to Crowd Funding