Verdict (Buy, Borrow, Skim, Pass?):
BUY – it’s awesome.
Crowdfunding: Propelling Social Innovation
Humans are social and emotional creatures and are intrinsically drawn to goals and pursuits to whom they feel connected to. That is how social innovation is actualized. For social innovation, tools like Twitter and Facebook can fastrack an idea or concept to fruition by pooling together ideas and resources from a large group of people. Yet often times, ideas and resources need money to come to fruition. This is where crowdfunding becomes an agent for change, democratizing social innovation and change by giving individuals the opportunity to put forth small donations for a cause they believe in. The beauty of this model is that it can be applied to almost any cause or industry.
Over the past year, we have seen forward-thinking individuals create crowdfunding platforms and projects in pursuit of solving a social problem and moving society forward. In the paragraphs below, I will highlight a few notable projects and platforms where individuals have harnessed the power of the crowd to bring about social change and innovation.
Civic and Community Projects
For social innovation at the civic level, crowdfunding helps engage citizens in public discourse to understand what initiatives are important to them. I believe civic crowdfunding will play an important role in the public sector, allowing individuals to directly engage with municipalities and support civic engagement. This is particularly important because it allows citizens to not only invest in their communities, but they can also volunteer time and other resources to a cause that will help their friends and neighbors at the local level.
By sourcing ideas from their citizens, the public and private sector can ensure all the issues important to their citizens are being addressed and potentially can match or donate funds towards specific projects. Crowdfunding is one of the most viable alternatives for financing urban projects, insofar as members of the community can become drivers for change when the government does not have the available resources.
One of the best examples comes from the UK crowdfunding platform Spacehive where a cash-strapped community was having trouble raising money for a community center. The goal of the project was to reverse the cycle of deprivation in the town by building a central hub for a learning programme four days per week, enterprise workshops, nightly events for children and young people, luncheon clubs for older people; community fitness sessions, and social parties. Through a crowdfunding campaign on Spacehive, the center raised £792,021 for the construction, furnishing, decoration, and landscaping of the center. This is an excellent example of the potential for communities to come together and pool their time and resources to solve an issue they care about. We are seeing these types of programs in a global scale, with crowdfunding platforms like Neighbor.ly facilitating civic and community projects to propel society forward. At the community level, crowdfunding will be a great way to support local businesses and entrepreneurship because everyone in the community has a shared interest of making it a better place.
One of the central benefits of crowdfunding is social media and web based platforms serve as a modicum for communication, allowing individuals to easily access capital regardless of where they are geographically situated. For individuals in developing nations, crowdfunding is a viable option insofar as the internet and mobile phones allow entrepreneurs to communicate with potential investors without the cost of travel. Through the internet, microfinance increases its depth of outreach, a concept which Kiva.org has demonstrated over the past several years by combining microloans with crowdfunding. While the model is currently loan based, the future could bring equity based models, where investors receive equity for supporting small and medium sized businesses. In addition to funding businesses, investors could also assume more of an entrepreneurial role by becoming part of the business and assuming operational responsibilities. With improved accessibility through mobile phones and social networking, the ease of information sharing will revolutionize not only the way loans are given, but the assumed roles and responsibilities between the lenders and entrepreneurs.
For charities around the world, the next few years will witness the democratization of philanthropy. Rather than donating a check to a large-scale charity or foundation where senior executives are pulling in six-figure salaries, donors will have a better understanding of exactly where their money is going and for what purpose. Research shows that individuals who already follow particular charities on social networking sites like Facebook or Twitter are likely to discuss the charity with friends and family, calling upon the power of the crowd to reach more potential donors, but also supplying those donors with information sources about the cause and how that money is going to be used. Research from Harris Interactive also indicates that many people feel a sense of “personal responsibility” for making the world a better place. Donation-based crowdfunding satisfies that sense of personal responsibility by allowing individuals to understand precisely how their donated funds will be used.
Crowdfunding sites like Indiegogo and Donate.ly offer charities and foundations an opportunity to discuss their cause, talk about how the money will be used, and even offer rewards and perks for donating. While we know charitable giving fulfills intrinsic desires to help others, utilizing perks and rewards systems is an effective way for inspiring individuals to give on a more frequent basis.
Moving forward, I believe 2013 will be a great opportunity for all people (whether you be a volunteer, entrepreneur, potential investor, policymaker, or donor) to explore the ways crowdfunding can move our societal goals forward. As crowdfunding becomes more commonplace as a fundraising mechanism, we will all be presented with opportunities to help each other and the world. Take advantage and learn how you can help. And above all, engage!
The Rise of Disintermediated Crowdfunding
Is this success typical? Will the next revolution in crowdfunding be disintermediated, open source fundraising?
The founders of Lockitron certainly think so: the team recently launched Selfstarter.us, an open source crowdfunding site offering entrepreneurs a generic skeleton and use of Amazon Payments to get their campaigns off the ground. Selfstarter.us is crowdfunding at its most basic level: it frees entrepreneurs from paying the commission required by most platforms, serves as a pre-ordering payment gateway, and collects multi-use tokens from customers.
Lumawake, an iPhone charging dock with built-in smart sensors and home automation connectivity, is currently taking pre-orders via the Selfstarter.us platform following their rejection from Kickstarter. The team, inspired by the success of Lockitron, has garnered over $72,000 in pre-orders for their smart dock.
The downside? No authentication, administration, mailers, or analytics tools. Entrepreneurs are largely left to their own devices with Selfstarter.us, causing us all to wonder: is it worth the time, money, and effort required to go at it alone? Or are those added-values worth the five percent commission most platforms are charging these days? I suppose it depends on the savviness of the start-up and their willingness to invest time, money, and effort into the tools they would have gotten as value-ads with an intermediary. However, for first time entrepreneurs, the infrastructure provided by crowdfunding intermediaries may be worth it.
Bypassing the intermediary may also increase the risk of fraud for donors. Many crowdfunding platforms scrutinize each project before launching, an effort which signals credibility to potential donors and safeguards them from fraud. On the other hand, the bulk of donors are usually made up of friends and family members—and is Mom really going to care that the campaign was not featured on Kickstarter.com? Perhaps not.
A crowdfunding portal is not synonymous with crowdfunding itself; rather, a portal is simply a mechanism that provides a means to an end. The spirit of crowdfunding is rooted in the conversations and idea-sharing between entrepreneurs and investors, and Lockitron proves those conversations can happen without an intermediary.
While it may be too soon to tell if Selfstarter.us will be the rising phoenix rising of crowdfunding, I believe intermediaries should start thinking about ways to provide more value to entrepreneurs and investors. If nothing else, it is a great opportunity to innovate—and that’s what crowdfunding is all about.
A New Form of Patronage?
In the arts, writers, musicians, and artists ranging from Shakespeare to Michelangelo were supported by patrons who commissioned their work and often times endorsed their political positions and social prestige. These days, patrons donate large chunks of money to museums and collections, and the money is often used to finance new collections or and pieces for the museum.
Crowdfunding may expand that…
The Louvre Museum in Paris launched a campaign in 2010 called “Tous mécenes!” (Everybody’s A Patron) to help finance a painting from 1531 called the Three Graces, by Lucas Cranach. The Louvre opened up the campaign to regular donors, allowing them to become a “patron of the Louvre” as a perk for their donation. After a successful campaign in 2010, the Louvre ran another crowdfunding campaign in 2011 to finance a collection called ‘The Treasure of Cairo.’
With both of those successes under their belt, the famous museum is planning on repeating this financing method once a year. The Louvre is currently running a campaign to raise money to purchase the two 13th-century, 20-centimeter high ivory statuettes; the target is €800,000 and ends in January. The Louvre has raised 55% of their funds so far.
While crowdfunding in the arts is very mainstream on Indiegogo and Kickstarter.com, this may signal the beginning of a major shift for museum financing. Who will be next in line? The Met? The Prado? Or will traditional patronage reign supreme?
To read more about the Louvre’s new fundraising mechanism, take a look at this article on Forbes:
Breathing Life Back Into Biotech
One of the things I love about crowdfunding is that the model can be applied to almost any industry or any problem. For the past several weeks, I have been collaborating with Scott Jordan, a Chicago-based investment banking executive with a focus on health care and early-stage biotechnology companies. The state of healthcare costs in the United States have been heavily scrutinized for decades, leading President Barack Obama to take swift action with the Patient Protection and Affordable Care Act (more commonly known as Obamacare). The legislation is the most significant regulatory action in United States health care since the passing of Medicaid and Medicare in 1965 and was responsible for a larger national conversation on the soaring costs of healthcare in America.
In the world of crowdfunding, healthcare has been at the forefront over the past year, witnessing the creation of several crowdfunding platforms designed to help individuals pay for expensive medical procedures and surgeries. Watsi.org is dedicated to funding high-impact medical treatments for patients in developing countries, where donors are connected with people dying of treatable illnesses because they cannot afford basic healthcare. Indiegogo, who recently expanded into Canada, Germany, France and the United Kingdom, help fund medical procedures for both people and pets. These platforms streamline the way individuals access and raise money for life-saving surgeries.
Yet one of the other less-talked about problems in healthcare and biotech is the funding that goes into early-growth companies. Many people are laboring under the misapprehension that biotech and drug discovery companies are cash-rich businesses and have plenty of access to funding. This is a misnomer; early growth biotech companies were hit hard by the recession because they are high-risk, expensive to fund, and go through long, drawn-out regulatory processes. As such, the crowdfunding sector has come to the rescue, creating platforms like Medstartr and Crowdfund Connect to help fund early-growth companies during the critical seed stage.
Crowdfunding the Box Office
Home-video sales and rentals, mostly reflecting DVDs, accounted for 68 percent of the $88.9 billion global filmed- entertainment market in 2008, according to estimates by New York-based PricewaterhouseCoopers LLP. According to Michael Morris, an analyst at UBS Securities LLC in New York, “The easier it becomes for consumers to purchase content directly and have it come to their big-screen TV, the more it takes away revenue from the physical retailer.”
While streaming and online rentals may be great for the consumer, DVD sales were one of the biggest revenue-generators for studio owners and are one of the central elements the film financing ecosystem. In the pre-production stages of a film, revenue projections are created by the studio, centering on the forecasted revenues of the following factors: theatrical release, DVD sales, release to cable broadcast television networks, and domestic and international inflight airline licensing. After those forecasts are created, the filmmakers take them to potential investors to secure financing.
As DVD sales have steadily decreased, investors have become more risk-averse in their investments, preferring to sequels and series like Harry Potter, The Hunger Games, Twilight, the Batman trilogy, the Hobbit series. These are viewed as safer investments.
Compounded with the recession, small and independent filmmakers experience difficulty in securing financing for their projects and are beginning to turn to crowdfunding as a means for raising capital.
While crowdfunding has traditionally financed creative projects, including independent films, Kickstarter.com has emerged as a film financing frontrunner in the world of independent and small budget films. In early 2012, Kickstarter released statistics showing in 2011, film & video projects received $32,473,790 in backing, a larger number than all projects in 2010. These pledges came from 308,541 backers, for an average pledge of $105.25 per backer.
For smaller, independent films with budgets less than $10,000,000, it is unlikely they will receive a theatrical release. As such, making the shortlist for independent film festivals like Sundance, Cannes, Tribeca Film Festival, and the Independent Spirit Awards becomes a key goal for filmmakers. For the Independent Spirit Awards, who released their nominations in late November, a total of seven Kickstarter funded films were nominated, leaving a number of film industry members scratching their heads, wondering if these nominations are a coincidence or if they are indicative and representative of the collaborative nature of crowdfunding and the mechanism’s ability to efficiently connect creative-minded people to create a great film.
In light of the 2011 Kickstarter figures and the nominations from the Independent Spirit Awards, members of the industry are wondering if this trend of crowdfunding small and independent films can be modeled for larger films and studios. What type of rewards will be offered to donors? Can a film raise $1,000,000 through small donations? Or are hybrid funding mechanisms the way to go? One of the most powerful aspects of crowdfunding is market validation. If filmmakers raise $200,000 via crowdfunding or 20% in equity, that is an important signaller to traditional sources of funding.
The democratization of film is upon us. As the repercussions of the iTunes and Netflix models continue to affect the market and squeeze traditional sources of funding, filmmakers will have to evolve for their survival—and perhaps will offer the rest of the industry some valuable lessons in fundraising and the power of the crowd.
Small Business Trends: Review of The Crowdfunding Revolution
Kevin Lawton and I are thrilled about the publication of the Second Edition of The Crowdfunding Revolution by McGraw-Hill this month. Pierre DeBois, founder of the strategic consulting firm Zimana, was kind enough to review our book on the Small Business Trends site. The review can be accessed here:
Interview with OurCrowd
Last week I had the opportunity to chat with Elan Yudkowsky from OurCrowd, an equity crowdfunding platform for accredited investors based in Israel. We discussed how crowdfunding is disrupting traditional financial mechanisms, the need to update laws and regulations to support entrepreneurs, and some of the hybrid mechanisms we will see in the market.
The interview is available here.
The Second Edition of The Crowdfunding Revolution is Available!
My co-author Kevin Lawton and I are thrilled to announce the publication of the 2nd Edition of our book, The Crowdfunding Revolution, by McGraw-Hill. This book aims to assist entrepreneurs, innovators, policymakers, and investors on their respective journeys through the crowdfunding industry.
More information on the Second Edition is available here.
It’s been a great adventure and we look forward to your feedback!