Crowdfunding

by Michael Gariffo

Docid: 00021016

Publication Date: 2105

Report Type: TUTORIAL

Preview

Crowdfunding is a financing concept in which large groups of people
contribute relatively small amounts of money to underwrite a single goal. Although the
term has gained popularity in recent years – thanks almost entirely
to online fundraising efforts – crowdfunding has actually been around for decades, if not centuries.
From home-grown coin tosses that raise money for local projects, to the wide-scale concerted efforts
that resulted in the building of the
Statue of Liberty, crowdfunding succeeded long before the information age. However, the modern
version of crowdfunding has taken on a much more specific framework. This report
will examine the modern form of crowdfunding, look at the most popular crowdfunding
sites on the Web today, and examine how a large, diffuse group of people can
take a concept from idea to reality.

Description and History

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The Early Years

Crowdfunding is by no means a new concept. In fact, it
is much older than its own name. For ages, fundraising drives have been helping
communities and even whole countries accomplish goals by harnessing the power of
large numbers of people. But applying the term crowdfunding to those
efforts was only first verifiably done in 2006 by a Google Group administrator
named Michael Sullivan.¹ He used the term to describe the main
concept of his Group, Fundavlog, saying, "Many things are important
factors, but funding from the â€˜crowdâ€™ is the base of which all else depends
on and is built on. So, crowdfunding is an accurate term to help me explain this
core element of fundavlog."² Since this apparent first use, the
power and reach of the concept and its definition have grown exponentially, with
the term becoming a household word while the concept has produced some of the
most popular products on the market today.

Arguably, the most well-known source of crowdfunded projects is Kickstarter, although it was by no means the first site of its kind. The
earliest crowdfunding Web site, and the entity that may have ushered the concept
of distributed funding into the Internet age, was a project called ArtistShare.³
This site allowed amateur musicians to seek funding
in order to get their work published and distributed. The important innovation
offered by this funding method was that the project creator was able to directly communicate with a large
sector of the
public to garner their interest and financial support. Instead of pitching an idea to a potentially jaded record
company executive or
hoping to get "discovered," the artist could simply put their work
before the public and ask them to support it financially.

Creators of other types of
ideas, projects, and initiatives were quick to see the value in this new method
of funding and were equally quick to utilize the Web as a platform
for realizing their goals. Over the next few years, crowdfunding sites
began to spring up rapidly, including EquityNet, a
crowdfunded source for equity capital; Pledgie, a site for pledging funds to a
new or existing cause; and IndieGoGo, a multi-purpose crowdfunding site that
supports products, start-ups, and charities.⁴ It was later, in 2009, when the
site that would come to be the face of the crowdfunding movement, Kickstarter,
would launch, signaling the start of the era in which crowdfunding would prove
that it could have just as much impact on the commercial world as any
high-powered investment group or highly-respected enterprise’s R&D department.

How Today’s Crowdfunding Works

It is important to fully understand the way in which today’s common
crowdfunding model allows ideas to become reality.

With crowdfunding sites having raised over $34 billion across the globe for
their various causes, the arena is much, much too large to cover in its
entirety.⁵
However, there are three nearly universal aspects of almost all crowdfunding campaigns that
make the concept possible: The initiator, or the person/group with the
idea; the crowd, or the people that provide the funding; and the platform, in
nearly all cases the Web site that moderates and administers the entire
funding process in exchange for a percentage of the funds being
transferred.⁶

Like all business ventures, crowdfunding campaigns begin when someone comes
up with an idea that they think the public will have an interest in. This idea
can be nearly anything: A consumer product, a media publication, a company, a charity, or even a civic project. Once this idea has been
established, the initiator takes the concept to one of the many crowdfunding platforms around the Web. The nature of the idea and the reward
potential investors expect to receive from their backing typically
determines the site that is the best fit for the initiator to select. Once
a platform has been chosen, a pitch, complete with a monetary funding goal, must
be produced. This pitch serves as the public introduction to the concept or idea
that the initiator believes is deserving of funding. It will often
include images and videos of the initiator explaining the concept in her or his
own words, as
well as demonstrating a prototype, business plan, or other bits of additional information that
are appropriate to the proposal. A request to fund a motion
picture could
present a clip of the potential movie; an album could include a single demo track;
or a consumer product might include a demo of the prototype in action. The
important thing in most successful crowdfunding campaigns is that, like all
forms of investment, potential investors need to be given a taste of the idea that their
funds will bring to fruition.

Once the concept has been firmly established and pitched, the next step is
securing funding from the public. This process begins when the pitch is placed
on the platform the initiator has selected and the public begins to be
introduced to the concept. This is also the point at which an important element
of the crowdfunding process goes into action: incentivization. Not all projects
include some form of incentive for potential investors. Crowdfunded charities,
for instance, do not typically provide any form of compensation for a donation,
as that would defeat the purpose. However, nearly all forms of commercial
crowdfunding projects must offer funders the promise of something in return for
the money they will be pledging to the project. Typically, the primary
compensation on offer is some commercial version of the finished project, should
it reach its funding goal. Some common examples would be that the funder
receives the final retail version of the product being produced, receiving
a copy of the movie they helped fund, or even just being mentioned or honored by
the initiating company when the campaign has been successfully completed. The nature of
the reward depends entirely on the type of project being undertaken and the level of
contribution being made. The latter factor – the tiers of funding rewards offered
– is extremely important as it allows even those with meager means to help move
a campaign forward.

Funding tiers are set by the initiator and are generally designed to provide
a greater reward as the amount pledged increases. This is not to
say that smaller pledges will not be accepted. Indeed, most funding campaigns and
platforms are more than happy to accept anything north of $1. However, the upper
tiers allow initiators to create greater incentives for those with greater
financial means, potentially netting the campaign a larger contribution than
it would otherwise receive. Imagine a fledgling mobile device designer that has started a crowdfunding
campaign for a new smartphone. Reward tiers could begin with a $5
contribution earning a personal thank-you message from the CEO while $20 would get the
funder a t-shirt with the company’s logo. However, since a consumer’s interest
in actually owning the product is typically what drives their desire to
contribute to the campaign, the bulk of the money usually comes from the tier in which a funder can obtain
the final version of the product they are financing, in this case a smartphone. To continue the example, a $200 pledge
might earn a contributor one of the smartphones in
question. However, for $300 that same contributor could receive an upgraded version of the smartphone with twice the storage, and for $500 he or she could
receive a limited-edition model with an exclusive "Founder’s Club"
engraving on the backplate. Although entirely fictional, this example should
give readers an idea of some of the reasons why crowdfunding has reached the
level of success it has. Getting in on the ground floor of a new idea seems to
be almost universally attractive, and if doing so gets them a shiny new
smartphone in the process, so much the better.

Once the pitch has been made and funding has begun to accrue, it is time for the initiator to begin fulfilling their promises to the contributors.
This is often where the crowdfunding concept tends to hit a sticking point. Due to
the often inexperienced initiator, the relatively small nature of their business, and the unpredictability of nearly any new business venture, delays
are frequently a part of the process. Although many contributors understand this
going in, others become easily disgruntled when the product they helped fund
does not arrive on time, or the media they helped to create misses its intended
release date. Many high profile projects have even been cancelled entirely, with
little or no funding returned to contributors. The reasons for these failures
have been myriad, but usually can be tracked back to mismanagement of funds or
a lack of the business acumen needed to run the project in the first place. Although
most major crowdfunding platforms do an excellent job of warning contributors of
these risks going into a pledge, the potential to receive nothing for
the money being provided is always a possibility. That said, the
inherent risks do not seem to be holding crowdfunding back. In fact, it is
flourishing more than ever, with stories on the nightly news constantly
referring to a new charity that proved successful due to the help of
crowdfunding, or a scrappy start-up that no major investors would give a chance
finding success but accomplished its goals because of a crowdfunding campaign.

All in all, crowdfunding’s main purpose and main contribution as a concept is its ability to make things happen that
might otherwise have been impossible. The final product may be as relatively insignificant
as a new gadget or as world-changing as helping an entire nation recover from a
natural disaster. However, in either instance, crowdfunding allows people to
contribute millions dollars in amounts small enough that it has little impact on
one’s personal
finances while having the potential to massively impact the world at large.

Leading Crowdfunding Sites

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The current leaders of the crowdfunding marketplace vary in their
specialties, funding scale, and the ways in which the entire process is handled.
However, they are all leaders in some way that allows them to have a significant
impact on the modern crowdfunding world.

Kickstarter

Founded – 2009
Specialties – Kickstarter is a multi-purpose crowdfunding site that
has helped fund movies, video games, consumer products, publications,
food products, consumer products, and even stage shows. Personal causes are
prohibited.
Fees – 3%+ 20% per pledge along with a 5% fee for the
total funds raised.
Description – It seems appropriate to start this section with the
Web site that most people think of when crowdfunding is mentioned. As
previously stated, Kickstarter was, by no means, the first or even one of
the earliest crowdfunding sites. However, its broad selection of
campaign categories as well as a history of producing some of the most
successful campaigns in terms of both funding and ultimate production
success have resulted in it becoming the most high-profile of the current
crowdfunding options. This reliance on the success of campaigns posted
to a given crowdfunding platform is emblematic of how modern crowdfunding
works on a macro level. Although most projects max out at the hundreds or
thousands of dollars level, certain high-profile campaigns can reach into
the millions, or even tens of millions of dollars. Kickstarter’s
history of serving as the platform for the majority of these hyper-successful
projects has allowed it to become the relative household name it is
today. In fact, Kickstarter has held the record for the most financially
successful crowdfunding campaigns several times including the current
record holder for non-crypto currency campaigns, a space simulation video game called Star Citizen. This
project has raised a staggering amount of development money, resting at more
than $358 million at the time of writing. This destroyed the previous record
of $10.3 million held by the original Pebble Smartwatch.⁷

Although the amount
of cash collected by Star Citizen is staggering, it is the product that it
originally
dethroned, the Pebble Smartwatch, that may have had the biggest impact on
both Kickstarter and crowdfunding as a whole than any single campaign to
date. When the campaign for the Pebble Smartwatch was launched, crowdfunding
had relatively little legitimacy with only certain niche online
communities relying on it to any significant degree. However,
the monetary success of this one campaign coupled with the subsequent fulfillment
of the promises offered by Pebble served to prove that crowdfunding could
work on a larger scale. Even more impactful than the initial success of the
campaign was Pebble’s long-term impact on the
smartwatch market as a whole. Not only was the crowdfunded company among the
first entrants into what has become a billion dollar market for wearables, but
they were among the first campaigns to go from crowdfunded obscurity to
nationwide fame. The launch of Pebble Smartwatches at major retailers as
well as the almost immediate scrambling by major technology manufacturers to
come up with a competing product cemented the fact that crowdfunded
projects could not only succeed but could disrupt entire segments of the
consumer market in ways that traditionally funded offerings could often
only dream of. While Pebble later absorbed by Fitbit (itself eventually
purchased by Google), the company’s
influence on the wearables marketplace and crowdfunding as a whole remains
to this day.

GoFundMe

Founded – 2010
Specialties – GoFundMe specializes in helping individuals to fund
life events such as weddings or graduations in addition to aiding people in
times of crisis such as losing a home to a fire or having a family member stricken with a major illness.
Fees – 2.9% plus a flat fee of $0.30 for each pledge
Description – Although some may argue that GoFundMe is
not as well known as Kickstarter, GoFundMe has actually taken in about three
times as much money as Kickstarter
during their respective histories, according to Crowdfunding.com, with
GoFundMe currently sitting at $9 billion, while Kickstarter has accepted
just over $3 billion in pledges.⁸
Although the two sites are obviously among the most powerful crowdfunding
platforms, they
do not directly compete with each other due to the fact that GoFundMe
focuses on non-commercial projects and ideas. Specifically, the site has
become somewhat of a defacto place on the Web for personal causes. When
tragedy strikes a family, whether its the sudden loss of a loved one, a
costly medical emergency, a natural disaster, or a home fire, they can turn to GoFundMe to
elicit aid from the public. This
charitable action is not the only service GoFundMe provides, however. It can
also be used in happier times to help fund positive events. Many families
have used it to help pay for graduation parties and gifts, weddings, family reunions,
or other social events. These ultra-small scale campaigns often draw solely
from the friends and family of the initiator to defray the cost of something
that is no more than a few hundred dollars. Although the scale of individual
charities or events almost never reaches the level of even modest
Kickstarter campaigns, the sheer volume of causes and proposals on GoFundMe
makes up for that in terms of the volume of funds being transferred.

GoFundMe is also something of an innovator. Since its launch in 2010, the
concept of crowdfunded charitable relief efforts has grown exponentially.
Now, following nearly any major natural disaster anywhere in the world, a
campaign is usually setup by one or more major charitable organizations to
help those affected. Although these campaigns are usually run by
multi-national entities like the Red Cross or other aid organizations, the
concept of pooling public resources on a grand scale was, if not pioneered by
GoFundMe, then at least enhanced by the example the site provides.

IndieGoGo

Founded – 2008
Specialties – IndieGoGo is very much like Kickstarter in that it
does not have any particular specialty. It does, however, restrict incentive
rewards to "gifts" and does not allow initiators to offer equity stakes in
their start-up as part of those rewards.
Fees – 2.9% plus a $0.30 per pledge flat fee.
Description – IndieGoGo was among the earliest general purpose
crowdfunding sites and remains in third place among the current generation
of platforms, in terms of lifetime revenue.⁹ Like Kickstarter, the site allows nearly any
commercial or creative endeavor to post a campaign. Although it does not have
the catalog of massive financial successes that Kickstarter can point
to, IndieGoGo has spawned several successful campaigns, including a
system for drawing edible honey directly from a beehive, an electric
bicycle, and a sequel to the film Super Troopers. There are also some
differentiators between Kickstarter and IndieGoGo which make the site more
attractive for certain initiators. Among these are the heavy reliance that
IndieGoGo offers on PayPal, which it uses to enact the majority of its
transactions, as well as the disbursement of funds to campaign owners. Also,
unlike Kickstarter, these funds are offered to the initiator immediately
rather than being put on hold until the completion of a given campaign.
Finally, IndieGoGo does allow personal causes to be posted on its site under
the IndieGoGo Life brand, meaning that it offers the services of both
Kickstarter and GoFundMe. Campaigns that qualify for IndieGoGo Life are not
charged any fees for collecting funds.

One aspect of IndieGoGo that does concern some potential contributors is
the fact that it fully supports instances where a campaign owner chooses
to keep the funds provided to a failed campaign that did not meet its
funding goals. Although the site charges a 9% fee for failed
campaigns, it does not provide any mandatory refund policy, leaving it up to
the individual initiator to choose between returning the collected funds or
keeping them, minus the 9% fee.

Patreon

Founded – 2013
Specialties – Patreon provides a novel approach to crowdfunding in
that it charges "Patrons" a recurring fee of their choice to
provide a flow of financing to a given artist or content creator. The types
of content on the site include YouTube videos, music, Web comics, digital
art, and other online offerings.
Fees – 5%-12% flat fee, with higher tiers includes
premium membership features such as promotional tools, app integration,
priority customer support, and a dedicated partner manager.
Description – Patreon is one of the newer crowdfunding sites on
the scene and one of the first to break away from the typical
funding models used by the sites listed above. Unlike the previous
platforms, Patreon allows its contributors, known as "Patrons," a
way to
provide a given content creator with an amount of funds of their choosing
on a regular basis, typically monthly. Patrons can
support many artists at once and can cancel their support at any time. Such
subscription-based crowdfunding provides new opportunities for those who
would like to use crowdfunding not as a method for bringing a single project
to fruition but as a way to make a regular living from their creations.
The possibility of drawing a constant income from things like video uploads
and digital art creations has resulted in Patreon becoming very, very
popular with the user communities of other sites including YouTube, DeviantArt,
Twitch, and other creative communities where users now have a way to
derive monetary rewards from an activity that they were already participating
in for free.

Unfortunately for Patreon, its successful trajectory has resulted in some
unwanted attention. The site was targeted by a large-scale hack in October
2015, resulting in 15GB of private data being posted online.¹⁰
This massive security blunder revealed not only the amount of money many
Patreon users were taking in on a monthly basis but also 2.3 million unique
email addresses, the content of many, many private messages sent between
users, and personally identifiable information. Although this type of
disaster can strike even the most well-established companies on the Web,
this particular hack occurring so early in the lifespan of Patreon
could well have a lasting impact on a site that had not even been in
existence for two years. With new alternatives rising all the
time, some users may wonder if it would be a good idea to seek their
funding elsewhere before spending any more time with a service that is
apparently unable to protect private data.

Teespring

Founded – 2011
Specialties – Teespring exclusively supports the creation of custom
apparel with user-provided logos and graphics for a given event or cause. The
site offers T-shirts, sweatshirts, long-sleeve shirts, tank tops, and youth
and baby apparel.
Fees – Variable, depending on the type of apparel on offer.
Description – Teespring is a perfect example of the kind of
laser-focused niche crowdfunding site that has sprung up in more recent
years. It offers to print T-shirts and other apparel in the user’s choice of
color and configuration, with the user’s artwork, as a method of raising
funds. The site is particularly popular among grassroots effort organizers
such as those attempting to fund a school trip, make a social event happen,
or even with those supporting a charitable cause. Once an initiator has set up a
campaign, contributors provide funds by buying a T-shirt or other piece of
clothing from that campaign. When an adequate number of sales have occurred,
the campaign is considered "tipped," meaning it has
fulfilled its goal. Everyone that contributed to the cause will then receive
their T-shirt or other clothing item in seven to 14 days from the close of
the campaign.

Although it is nowhere near as versatile as the crowdfunding platforms
listed above, this simplified way of securing funds offers a quick,
no-hassle method of launching a crowdfunding campaign while also providing a
method of incentivized contribution to charitable causes, something few other
sites offer. Teespring will likely never reach the volume of platforms like
Kickstarter or IndieGoGo, but it does serve a very sensible and logical niche
in a market where crowdfunding is becoming a more and more ubiquitous option
for even the most minor fundraising efforts.

Summary

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There’s no reason to believe that the growth of crowdfunding
will slow any time soon. Although it took a few decades after the birth
of the modern Internet for people to catch on, they have now realized that there
is a whole new source of economical support available to them. Whether it is to
help them in a time of need or to get a business off the ground that never
would have had a chance in the past, crowdfunding offers opportunities to the
"little guy" and creates a way for even the most obscure, unheard of
individual to take a really great idea and turn it into something everyone in
the world knows about in just a few short years.

References

1. "Crowdfunding: Earliest Citation." WordSpy.
Retrieved October 2015.
2. Sullivan, Michael. "Fundavlog." Fundavlog.
August 2006.
3. "Artistshare.com Site Info." Alexa
Internet. Retrieved October 2015.
4. "Can You Spare a Quarter? Crowdfunding Sites Turn Fans into Patrons of
the Arts." Wharton College at
the University of Pennsylvania. December 2010.
5. Kearl, Mary. "Best Crowdfunding Platforms." Investopedia. February
2021.
6. Ordanini, Andrea; Miceli, Lucia; Pizzetti, Marta; and Parasuraman, A. "Crowdfunding:
Transforming Customers into Investors through Innovative Service Platforms." Bocconi University. February 2013.
7. Yin-Poole, Wesley. "Star Citizen Shoots Through the $200m Raised
Barrier." Eurogamer.
November 2018.
8. "Top 10 Crowdfunding Sites." Crowdfunding.com. Retrieved October
2019.
9. Ibid.
10. Goodin, Dan. "Gigabytes of User Data from Hack of Patreon Donations
Site Dumped Online." Ars Technica. October 2015.

About the Author

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Michael Gariffo is an editor for Faulkner Information Services. He
tracks and writes about enterprise software and the IT services sector, as well
as telecommunications and data networking.

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