Crowdfunding - The Good, The Bad and The (really) Ugly

Introduction

Crowdfunding is by definition, “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.” The term crowdfunding was used for the first time in the year 2006 when Michael Sullivan launched Fundavlog. This, however, was a failed attempt to fund events and projects related to a video blog.

With the signing of the JOBS Act on April 5th 2012, the word of the day became “crowdfunding” and publicity from this historic event generated interest from all corners of the world and helped push crowdfunding into mainstream news.

The first instance of online crowdfunding took place during 1997, when fans funded the entire U.S. tour for the British rock group Marillion, raising just over US$60,000 in donations through a fan-based Internet campaign.

If the crowd and the web are considered to be two essential elements of crowdfunding, its very first examples came into being in the 1990s with the emergence of platforms for charity fundraising and projects funded by Internet-based campaigns. The UK-based charity fundraising platform JustGiving was founded in the year 2000.

The modern crowdfunding model is generally based on three types of actors: the project creator who proposes the idea or project to be funded, individuals or groups who support the idea, and a platform that brings the parties together and facilitates the transactions.

Part 1-The Good

The crowdfunding industry is doubling or more every year, and is spread across several types of funding models including rewards, donation, equity, and debt/lending.

Just five years ago there was a relatively small market of early adopters within online crowdfunding, helping raise $880 million during 2010. Things changed fast with $6.1 billion raised in 2013, $16.2 billion in 2014, and a whopping $34.4 billion in funds raised during 2015. In comparison, the Venture Capital industry invests an average of $30 billion each year. By 2016 the crowdfunding industry is on track to account for more funding than venture capital, according to a 2015 report by Massolution.

The highest reported funding by a crowdfunded project to date is Star Citizen, an online space trading and combat video game being developed by Chris Roberts and Cloud Imperium Games, which - as of 21 November 2016 - claims to have raised over $133,000,000 USD using a combination of crowdfunding platforms including its own.

One of the most influential factors behind the rapid growth of crowdfunding over the past 10 years was due to the global recession of the late 2000’s and early 2010’s. This highly turbulent time saw many small and established businesses struggling to survive.  Crowdfunding saved some of these businesses from crumbling into nonexistence by facilitating the raising of much needed capital. Traditional sources of funding – bank loans, overdrafts, credit cards – were all but drying up as the financial industry strained under the immense pressure the recession brought, with several household brand names suddenly put out of business too!

There are many success stories around, some of which I have personally been involved in helping reach way beyond their initial funding goals. FOBO TIRE, the tire pressure monitoring system (TPMS) managed to raise a total of $186,105 USD through their Indiegogo campaign back in 2014 but then went on to even greater things. Their products entry into retail happened through UK retailer Maplin and since then they have picked up a few awards along the way too.

Just last week, Phazon CEO, Chris Houle was chosen to appear on the CBC show Dragons Den, securing a great deal from the Dragons. His Indiegogo campaign, having raised over $2M earlier this year.

Many have heard of the highly successful Occulus Rift Kickstarter campaign launched during Q3 of 2012, raising a total of $2,437,429 and with Mark Zuckerberg of Facebook announcing the purchase of the company for a huge $2B USD on March 25th, 2014

There are many other similar successes out there including the renowned Pebble Watch who managed to raise a total of over $30M through 2 crowdfunding campaigns on the Kickstarter platform.

Conclusion

Startups rarely survive without funding and crowdfunding has enabled entrepreneurs to bring their ideas to the crowd for validation, and through engagement with potential customers, gain valuable feedback too.

Crowdfunding is here to stay!

Look out for Part 2 – The Bad, where I delve into the aspects of crowdfunding that are rarely spoken of, including the use of the dreaded word “scampaigns”.

About The Author

Shane Liddell is the CEO and chief Crowdfundologist at Smart Crowdfunding LLC, the crowdfunding marketing agency. He became active within the crowdfunding industry early in 2012, seizing the opportunity to offer help to crowdfunders from all corners of the world. He has delivered successful campaigns for entrepreneurs, startups, corporations and filmmakers and has assisted over 500 crowdfunders with campaign development, consulting, marketing and promotion services, some of whom have raised millions of dollars in the process. He has attended numerous equity crowdfunding industry events, including the SEC Small Business Forum and the CfPA Summit in Washington DC. Shane holds the position of Executive Director of the Crowdfunding Professional Association (CfPA).