03 October 2016

BUSINESS - Crowdfunding is Overtaking Venture Capital

Crowdfunding refers to a growing phenomenon of funding a wide variety of projects through a large number of small donations from individual funders.

It sounds simple enough, but crowdfunding is turning traditional funding models on their heads, and the crowdfunding market is growing at an exponential rate.

It’s happening in a variety of ways, for a variety of purposes, but at the core of the crowdfunding model is the idea of community and individual engagement with larger projects.

Crowdfunding allows individuals who are not independently wealthy to participate in financially supporting research and projects they care about, and allows entrepreneurs who might otherwise struggle to attract capital to connect to their supporter base directly.

Crowdfunding has been present in artistic creation for centuries, and subscription models for book publishing are an early form of the financial exchange. Even Mozart and Beethoven used versions of crowdfunding to fund their compositions and concerts.

However, crowdfunding today is global and digital.

The online environment is an integral part of the crowdfunding movement, whether you mark the beginning of crowdfunding in 1997 with British band Marillion’s fan-funded tour, or in 2003 with the introduction of ArtShare to the digital world.

Contemporary crowdfunding is intricately linked to the development of mobile technology and social media, and one of the primary indicators of a project’s success is its ability to gain social media traction.

Amanda Palmer is an example of an artist who has successfully used social media and crowdfunding to move away from traditional funding through a label.

She has successfully Kickstarted an album and tour, and has described the relatively new site Patreon as Crowdfunding 2.0.

Looking at Patreon’s numbers it’s impossible to argue with the success of the platform. Creators were paid $6.1 million USD in May 2016 – a huge amount of money being paid to creators, with an average individual pledge amount of only $6.70 USD.

Unlike Kickstarter or IndieGoGo, Patreon pays creators on an ongoing basis, with funders pledging per creation.

Although Patreon is specifically for creatives, this model has potential for researchers and developers as well.

When crowdfunding fails, it highlights the risks associated with the model.

The Ubuntu Edge was an ambitious campaign that raised $12.8 million, but fell far short of its $32 million goal to develop a cutting edge phone.

The money put into the project – including marketing, design, and development – was not recovered and the $12.8 million was refunded to backers.

Crowdfunding offers an important alternative source of funding for creators and developers, but one main drawback is that while it provides individual engagement and investment in projects, it also demands that individual creators take on significant risks in putting a campaign together.

As crowdfunding overtakes venture capital, predicted to happen this year, these risks and benefits will have to be weighed.  

Legislators are also going to have to grapple with the impact of crowdfunding on taxes and economic models.

New legislation in America will change the way that entrepreneurs can use crowdfunding to raise funds for their start-ups.

Equity crowdfunding is already regulated in Canada, meaning that restrictions on using the model for start-up funding are already present.

These regulations are critical for maintaining tax structures and ensuring that both funders and entrepreneurs are protected.

(Forbes Magazine 2014)

By Tiffany Sostar
Tiffany is a writer, editor, academic, and animal lover who came late to her appreciation of pets. At 18, a rescue pup named Tasha saved her from a depression and she hasn't looked back. She has worked as the canine behaviour program coordinator for the Calgary Humane Society, and was a dog trainer specializing in working with fearful and reactive dogs for many years. She doesn't have any pets right now, but makes up for it by giving her petsitting clients (and any dogs she comes across on her frequent coffee shop adventures) extra snuggles.

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