What is "Crowdfunding"? Is it really that good?

Larralde (2010) defines crowdfunding as “an open cell, essentially through the internet, for the provision of financial resources either in the form of donation or in exchange for some form of reward and/or voting in order to support initiatives for specific purposes”. 

The definition includes many types of crowdfunding:

·  Civic Crowdfunding /Philanthropic Donations i.e. Statue of Liberty example

·  Reward Based Crowdfunding i.e. Kickstarter, Indiegogo

·  Securities Crowdfunding/ Equity Based Crowdfunding (many legal issues involved). 

Over the last couple of years, there has been impressive growth in crowdfunding. This has especially been seen in rewards-based and peer-to-peer lending industries. In 2013 alone, there has been significant progress in legislation regarding equity crowdfunding in the US. There has been a growing trend in companies using Kickstarter as a source of crowdfunding as part of their marketing strategy to attract media attention and approach professional investors such as business angels and venture capitalists (Mikhaylova, 2013).

How do crowdfunding platforms work?

Crowdfunding platforms generally work on a basis of ex post facto (Kappel, 2009). This is where the product/service is offered for after when the financing is provided. This is sometimes called an ALL OR NOTHINg (AoN) system. If we say for example, when a project on Kickstarter hits its project goal, the crowdfunding platform is able to release the funds to the company. Therefore, when the goal is actually achieved the customer’s payment pledge is only then acted upon. On the other hand, the ex ante crowdfunding method of capital formation has been increasingly popular in the entertainment industry by independent filmmakers, artists, writers and performers (Kappel, 2009). This is where financial support is obtained before the goal has been reached (Koren, 2010). An example of this method is further supported by Obama’s success with online fundraising for his campaign. This was evidence for people’s willingness to give financial support and invest in someone who they believe in.

 Is this a good idea? 

Personally, I think that crowdfunding is great idea. People do tend to say that it allows good ideas that might not be able to get bank loans or conventional funding to be set out directly to the members of the public with the like-mined interests wherever they may be. Due to their limited resources, many small charities are usually overlooked in favour of more established ones. Through crowdfunding, this allows these causes to find supporters via the Internet and social media. This can also help causes all over the world (Quinan, 2012). 

There are many examples of people using crowdfunding. If we look at Kickstarter, we would be able to find many crowdfunding examples. Many of these crowdfunding projects have been increasingly successful. However, on the other hand some have not. 

If we look at the device in the example in Figure 1, we can see that this project was successfully funded on 23^rd March 2012 and has been pledged for $76,340, higher than the initial $50,000 goal. This device is called the ‘NODE’, and is a modular, Bluetooth enabled device that puts the power of practical sensors in your hands. Now is this impressive or what? It amazes me how fast the world is changing and with the support of platforms such as Kickstarter, new inventions can be supported to help achieve success in the future.

Figure 1.

But what are the dangers involved? 

However with everything in life, there are dangers involved. If the crowdfunding campaign fails and stays on the crowdfunding website, it would affect reputation of the company, thus could be harmful. Additionally, some rewards can cost a lot of money and valuable time. Time is not an unlimited resource, it is important to take this into consideration and be practical. It has often been experienced that the creators will add extra rewards as it gets closer to the end, without considering the extra time those rewards will actually involve and also not to mention the added cost. Therefore, rewards need to be considered very carefully. 

By weighing up both the pros and cons of crowdfunding, I believe that this is a good platform for companies to receive funding for their investments. Platforms such as Kickstarter and Indiego are ideal for this as they help to raise awareness. Hopefully at some point in the future I would like to open my own business and I would most definitely use these crowdfunding platforms to get my ideas running.