A penny for your thoughts: Why crowdfunding is taking off

September 2nd, 2010 by Ville Miettinen

Ever since our ancestors scratched each other’s hairy backs, humans have seen the benefit of lending a helping hand. With the rise of corporations, charities and stock exchanges, this assistance has become more complex, but in many respects it still relies on the same basic principles.

At Microtask we just closed a successful funding round, which got us thinking about how the methods of raising capital are changing.

For a startup like us, funding usually starts with the three Fs (family, friends and fools), before moving to angel investors, public funding, venture capitalists and finally, if things go well, a public listing on a stock exchange (although in the last decade, a trade sale to a larger company is a much more likely exit scenario). Today, startups – like almost anyone else looking for funding – can also turn to the crowd.

Friending for funding
Crowdsourced funding, or crowdfunding, at its most basic, involves raising funds through a network of people. Crowdfunding can help with everything from paying for a new heart to buying a real-life fantasy football team, investing in fashion to fulfilling a personal dream. What is new is not so much the underlying concepts – charities and cooperatives have been doing similar things for years – but how easy and effective it now is thanks to the internet, micropayment technology and social media.

But crowdfunding is not just about raising money. It is also an excellent way to publicize an idea and get feedback on it. If the crowd, in its collective wisdom, supports an idea, this in itself can be a very powerful marketing tool to attract other investors (and later consumers). It is not surprising then, that over the last few years a number of exciting companies have sprung up to facilitate crowdfunding for a wide range of causes.

At one end of the crowdfunding spectrum are companies like Crowdcube and Laraghfinance, which help businesses raise funds by offering the public real equity stakes (both have apparently overcome financial regulator issues). Perhaps because of a current lack of available venture capital, both of these companies are generating a lot of interest. Along with these companies, increasing numbers of businesses, such as Trampoline Systems, have also established their own systems to raise funding directly from the crowd.

Sounds like a great idea
The traditional music industry, struggling with declining record sales, has also turned to the crowd for help. Leading the charge is Sellaband, which helps bands reach out to individual investors to pay for recording costs. These investors then share in any profits from the album. Likewise, Artistshare has been helping artists fund albums since 2003, by offering investors extra material, published accreditation and even a chance to help with the creative process (in 2004 Maria Schneider won a Grammy with its help). AKA Music is doing similarly exciting things.

If you prefer the visual arts, CinemaShares offers the opportunity to buy a piece of a Hollywood blockbuster. It raises money for films by giving small investors the chance to buy individual shares. If you’re more of an art-house type, you can invest in indie films with Indiegogo. Vloggers can also access the crowd through sites like Have Money Will Vlog. Once again, some are going directly to the crowd, like the people behind the film The Cosmonaut, which takes small donations in exchange for accreditation as a producer (at last count the film had 2,242 credited producers).

Give a little bit
But probably the most visible benefactor of crowdfunding applications are charities. Who among us hasn’t been asked to donate to a charity in support of an old friend’s crazy endeavor? With companies like Just Giving and First Giving donating to such causes is almost annoyingly easy (now there are no excuses not to give). In a similar vein, Pledge Bank enables people to make pledges, and challenge others to do so as well. Others provide great opportunities for longer term giving, such as Give.fm which relies on clever use of micropayment technology.

Finally, of course, there are the more general crowdfunding providers, such as Kapipal, ChipIn, Fundable, Kick Starter and Rocket Hub. Each has successfully helped scores of people and organizations achieve their goals.

All these examples do not mean that crowdfunding is suitable for every situation or without its flaws. But what is clear is that a growing number of people and organizations are seeing the benefits of turning to the crowd for a helping hand.

In an era of belt tightening, crowdfunding may be exactly what innovators, charities, creative-types and the wider economy need. Not all such ventures will end happily, but by inviting public scrutiny as well as funding, failures will surely be in the minority.

As Abraham Lincoln (and later George W. Bush, sort of) said: “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time. ” With the wisdom of the crowd, individual investors – unlike former presidents – are much less likely to make fools of themselves.

About hbouzas

Born in Buenos Aires, Argentina. Studied Physics at the University of Buenos Aires. Joined Schlumberger in February 1985 in Houston, Texas, and worked in several technical and managerial positions until 2000. From 2000 until 2008 held several management positions in Abingdon, UK; Calgary, Alberta and London, UK. Worked in the areas of Geophysical Exploration, Geological Modeling, Structural Modeling, Reservoir Modeling and Petroleum Economics and holds several patents. He is currently the Norway Technology Center Manager for Schlumberger Information Solutions and is based in Oslo and Stavanger. Main interest are software, technology, innovation, 3D visualization, design, human computer interaction, energy, environment.
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