Crowdfunding is capitalism without equity.
An entrepreneur comes up with a product or an idea that needs capital to become a reality. But instead of finding investors, the entrepreneur goes to the Internet and offers rewards if the audience will contribute to his idea or product. The rewards are often simply the product itself, or some kind of commemorative souvenir related to the product.
This is an idea that grew out of the contributor-driven creative projects of the early 2000s. Webcomics, musical acts, digital artists and video game developers asked the audiences that visited their web sites for contributions to help cover the basic costs of web hosting and overhead. As these projects grew, contributions were replaced with product offerings and the amateur artists became businessmen.
What crowdfunding does is accelerate this process so the transition from amateur idea to professional product can take place in the interval of a month or so. The entrepreneur is asked for what amounts to a business plan and offers various rewards, product types or simple recognition to his contributors based on how much they contribute.
At last report, sites like Kickstarter had raised over $800 million for various projects ranging from the Pebble Watch to Amanda Palmer’s Grand Theft Orchestra. There can be no doubt that this process is compelling to both future business leaders and designers and to their future customers as well.
Kickstarter was one of the original crowdfunding sites. Since its launch in 2009, many others have sprung up including sites like Fundable and Early Shares. These new sites can legally offer both equity rewards and simple rewards as a consequence of the change in U.S. securities law in 2013. Equity shares are exchanged for contributions on equity crowdfunding sites in much the same way public shares are sold to an investor in an initial public offering.
For simple reward sites where ownership of the company or product is not being offered, crowdfunding is often compared to pre-sales or pre-orders of a product. For example, some crowdfunders might offer a copy of a book they are writing in exchange for a twenty dollar contribution. When the campaign ends, they simply ship a copy of the book funded by those contributions to everyone in the $20 category. This is really no different than announcing the book is available for pre-orders for $20 and then shipping any pre-ordered books when it is released.
So does crowdfunding replace pre-ordering?
What crowdfunding offers the contributor that pre-ordering doesn’t is the feeling they are participating in creative projects in a new way. They get to feel like they are part of a team that is working together on something new. This is different from simply being a customer. This is also where crowdfunding gets its appeal. It reinforces the concept of community at a time when community matters most.
While free money sounds like a great option for new businesses, there are some considerable drawbacks to crowdfunding, not the least of which is the amount of time and energy required to set up a campaign and to manage it while it is live. Driving tens of thousands or hundreds of thousands of people to a web page is always expensive. Traffic is paid for either in time invested or dollars spent.
To be effective, a Kickstarter page has to be updated every day with new material. In the meantime backers, contributors and comments need replies and thank you notes. Questions also need to be answered, often from sites that are covering a campaign and publicizing it. This is easily a full-time job for one person and a considerable amount of effort for each person even with a group of people pitching in.
The key to a successful campaign is planning followed by more planning. Even though a campaign might last only a month or so, it takes six months to a year of preparation, deliberation and communication with other web sites, creative professionals and potential backers to make absolutely certain that once launched, the campaign will reach its goal. A good rule of thumb is that a campaign should reach half its goal by the end of the first week. If contributions are lagging, it usually means there wasn’t enough promotion done before launch.
Ultimately, crowdfunding is promotion. While all the work might produce financial rewards for a company or product, at its most basic a crowdfunding campaign is a publicity stunt. Entrepreneurs that treat it as such will see a much greater chance of reaching their financial and business goals.