In the old days before the vast power of the Internet to share information, groups of people (most often friends and family) would pitch in to offer financial support for an individual or organization’s project or cause, ensuring it could be funded and completed.
By today’s understanding, crowd funding has become synonymous with fundraising through social media networks that exist on all sorts of topics, where the beneficiaries of the funds can be for-profit or non-profit organizations. Social media presents a powerful platform to create a movement, especially when emotion is involved.
Take the well-publicized story of the New York grandmother who was harassed on a city bus a few months ago by a group of youths. A bystander caught the event on video and posted it to the Internet. A kind man, Max Sidorov of Toronto saw the heart-wrenching video of Karen Klein’s traumatic bus experience and created a $5,000 campaign on Indiegogo.com to give Klein a much-needed vacation. Over 30,000 donors saw the campaign video and responded, raising over $700,000. That’s a lot of support by a group of empathetic people moved by her experience. And good for Max for initiating such a cause.
For-profit businesses that are successful and became Internet phenomena are those that produce products like the Pebble smartwatch invented by Eric Migicovsky while he was biking through Europe.
He wanted a watch that allowed him to check emails where he could simply look down at his wrist instead of dropping his smartphone while he was riding. The campaign raised just under $10.3 million on the popular crowdfunding platform, Kickstarter in early 2012 from nearly 69,000 backers having initially sought only $100,000.
The watch was popular because of its cool factor, uniqueness, style, usefulness and versatility with the functionality of computer applications such as email and social media that make it convenient and easy for athletic people to stay connected.
There are four models of crowd funding that exist today:
Rewards – funders receive a non-financial reward in return which could include pre-buy of the product, name credits/public recognition or an act of appreciation of some kind.
Donations – funders believe in a particular cause and have a desire to help so donate money to advance the project without any expected return. (philanthropic motives)
Equity – funders are excited about a new venture and believe it will provide monetary gain in the way of an investment in the project/company. They are investors in the business and gain equity or have profit sharing arrangements.
Loans – funders lend a principal amount of money to a venture collecting interest for the term period, similar to a bank, and expect their principal returned upon maturing of the loan.
A crowd funding project that does well is like any successful business, the product or service serves some purpose in society where people are excited about owning and using it, or their emotional buttons are pushed and they donate to a cause where they feel their contribution can make a difference.
Anyone with a good idea where their story is well told and appeals to the “crowd” can use online funding methods however the individual has to keep in mind that there must be a community that has developed around the project, or one that exists somewhere that can be accessed. If people do not know about a project, they won’t rally around it.
There are numerous examples of individuals or business putting up a crowd funding profile without a compelling enough reason for virtual backers to get behind it. And without a solid marketing program, it’s the old tree in the woods analogy. If a tree falls and no one is there to hear it, did it really fall? The same applies with crowd funding. Using the power of social media, one needs a great product or service and a sound marketing strategy. There are circumstances where a video like the grandmother bullied on the bus goes viral because it yanks at people’s heartstrings, or a cat keying a piano is shared millions of times because it’s so different from what we are used to seeing.
It’s the same with traditional media, any project’s “story” that is highly innovative and useful, or out of the ordinary in an entertaining way has public interest value and therefore gets shared. Popular project categories with strong stories that tend to get funded most often include: the arts, film, food, technology and philanthropy, among others.
Websites like Kickstarter.com and Indiegogo.com are online crowd funding platforms that allow individuals, companies or causes to upload information on their project where donations are collected through secure payment processes such as Paypal and donors can easily share the information with their social media networks.
As mentioned above, one doesn’t require a lot of resources to upload a profile and tell a story through a crowd funding platform however once you obtain the funding, you must follow through with your promise of delivering the goods or services or you will loose all credibility and could face lawsuits.
Nonprofits have also used crowd funding very successfully. Organizations like the Red Cross raised money online for their humanitarian projects such as the 2010 Haiti earthquake.
In order to build a community that will support crowd funding or micro-donations, it’s important to target Internet-savvy people, (the GenX and GenY, 45 or younger adult population) who are comfortable with online transactions. Most are educated, technology friendly and appreciate products like watches, game consoles, and art, and are comfortable donating online.
Recently online crowd funding entered the North American equity markets as policy makers in the United States passed a bill known as the JOBS Act signed by President Obama on April 5, 2012. This act allows for a wider pool of small investors to take an equity stake in a company with fewer securities restrictions. The U.S. Securities and Exchange Commission is currently working on specific rules and guidelines to enact the legislation while still protecting the needs of the investor. This opens up a new playing field for entrepreneurs and the investment community. Finance groups are lobbying around equity crowd funding in Canada, however, at this time it remains illegal.
That said, we are most likely not going to let more of our talent and capital flow south of the border. Eventually our regulators will figure out a way to protect the investor so that we can be competitive with our U.S. neighbors, not to mention the UK and Australia who have been using online equity crowd funding successfully for some time.
Where do you think this new channel of fundraising will lead our businesses, economies and societies? We’d enjoy hearing your thoughts.