Role of the Crowd: Crowdfunding and beyond by David Seaton

The role the crowd plays in the process is an essential component to
eventual project outcome. Despite the seemingly simplicity of
exchanging a promise to pay for a promise to deliver, the entire
process is highly interactive. Given the finite funding time
constraints successful crowdfunding projects require viral marketing,
which is ultimately determined by the crowds overall involvement. Each
individual acts as an agent of the offering, selecting and promoting
the projects in which they believe most in. They will sometimes play a
donor role oriented more towards providing help on social projects. In
some cases they will become shareholders and contribute to the
development and growth of the offering. Each individual disseminates
information about projects they support in their own personal online
communities, generating further support in the role of (promoters).
Motivation for consumer participation stems from the feeling of being
at least partly responsible for the success of others’ initiatives
(desire for patronage), striving to be a part of a communal social
initiative (desire for social participation), and seeking a payoff
from monetary contributions (desire for investment). This is often the
most overlooked benefit of crowdfunding, as regardless of the project
type (Equity or Rewards) the early funders will often become brand
evangelists driving accelerated growth before early adapters and
beyond market maturation.

Crowdfunding Risks and Industry Barriers: by David Seaton

Crowdfunding also comes with a number of potential risks or barriers.

Reputation – failure to meet campaign goals or to generate interest
result can be considered a public failure. Reaching financial goals
and successfully gathering substantial public support but being unable
to deliver on a project for some reason can severely negatively impact
one’s reputation ultimately causing irreversible damage.

IP protection – many Interactive Digital Media developers and content
producers are reluctant to publicly announce the details of a project
before production due to concerns about idea theft and protecting
their IP from plagiarism.

Donor exhaustion – there is a risk that if the same network of
supporters is reached out to multiple times, that network will
eventually cease to supply necessary support.

Public fear of abuse – concern among supporters that without a
regulatory framework, the likelihood of a scam or an abuse of funds is
high. The concern may become a barrier to public engagement.

Time Investment – The required level of time resources which must be
dedicated prior to launching a crowdfunding project, and during the
management of the project itself, can often be overlooked and
misjudged by many people considering raising funding through
crowdfunding. Crowdfunding draws a crowd: investors and other
interested observers who follow the progress, or lack of progress, of
a project. Sometimes it proves easier to raise the money for a project
than to make the project a success. Managing communications with a
large number of possibly disappointed investors and supporters can be
a substantial, and potentially diverting, task.

Crowdfunding Benefits and risks: Crowdfunding and Beyond by David Seaton

Crowdfunding campaigns provide producers with a number of benefits,
beyond the strict financial gains. The following are all examples of
the non-financial benefits of crowdfunding.

Profile – A compelling project can raise a producer’s profile and
provide a boost their reputation.

Marketing – Project initiators can show there is an audience and
market for their project in advance of full scale launch. In the case
of an unsuccessful campaign, it provides good market feedback and can
even allow for positive iterations and changes to be made prior to
sunk costs.

Audience engagement – crowd funding creates a forum where project
initiators can engage with their audiences. Audience can engage in the
production process by following progress through updates from the
creators and sharing feedback via comment features on the project’s
crowdfunding page. Long-term engaging an audience to this degree is
precisely the type of community building that can lead to the creation
of an loyal evangelist customer base.

Feedback – offering pre-release access to content or the opportunity
to beta-test content to project backers as a part of the funding
incentives provides the project initiators with instant access to good
market testing feedback.

Proponents of the crowdfunding approach argue that it allows good
ideas which do not fit the pattern required by conventional financiers
to break through and attract cash through the wisdom of the crowd. If
it does achieve “traction” in this way, not only can the enterprise
secure seed funding to begin its project, but it may also secure
evidence of backing from potential customers and benefit from word of
mouth promotion in order to reach the fundraising goal. Another
potential positive effect is the propensity of groups to “produce an
accurate aggregate prediction” about eventual market outcomes.
Proponents also identify a potential outcome of crowdfunding as an
exponential increase in available venture capital. One report claims
that If every American family gave one percent of their investable
assets to crowdfunding, $300 billion (a 10X increase) would come into
venture capital.  Proponents also cite that a benefit for companies
receiving crowdfunding support is that they retain control of their
operations, as voting rights are not conveyed along with ownership
when crowdfunding.

Rewards Based Crowdfunding Vs. Equity Crowdfunding: By David Seaton

Reward-based crowdfunding
has been used for a wide range of purposes, including motion picture
promotion, free software development, inventions development,
scientific research, and music albums. There are no regulatory hurdles
required to exchange a promise to deliver a product in return for an
up-front payment. Thus, many of these rewards based crowdfunding
platforms core competitive advantage rests in the utility of their
website design infrastructure and overall competiveness in their fees
being charges. While some crowdfunding platforms offer ancillary
services and perks, the primary distinction between most Rewards based
crowdfunding platforms are their fees charged and rules surrounding
policies relating to “‘Keep-it-All’ (KIA) and ‘All-or-Nothing’ (AON).
“‘Keep-it-All’ (KIA) is where the entrepreneurial firm sets a
fundraising goal and keeps the entire amount raised regardless of
whether or not they meet their goal, while an ‘All-or-Nothing’ (AON)
is where the entrepreneurial firm sets a fundraising goal and keeps
nothing unless the entire goal is achieved by the pre-determined
deadline.

Equity Crowdfunding: Equity Crowdfunding is the process where a
project funder receives actual pre-defined ownership shares of a
crowdfunding company, usually in its early stages, in exchange for the
equivalent amount of money pledged. The project’s success is
ultimately determined by how effectively the company’s vision and
long-term economic viability can be demonstrated. A similar decision
making framework and project approval process is analogous to the
investment considerations Angel investors make when considering
private placement investments, with the exception being that the lower
financial entry level barriers can occasionally lead to a more
recreational and informal project acceptance criteria. Equity
crowdfunding is a mechanism that enables broad groups of investors to
fund startup companies and small businesses in return for equity,
however when compared with the firm control exhibited by many V.C
firms, equity crowdfunding is essentially not much difference from the
more passively supportive investment approach already utilized by many
Angel investors for decades, with the key distinction being the
platforms inherent scalability and mass community design appeal.
However, whereas many rewards based crowdfunding platforms rely
heavily on how user-friendly their platform is and/or the total size
of their internal network of funders, with equity crowdfunding firms
this is only the beginning. For a more active investment advisory type
of approach is essential in order to effectively maximize issuing
companies equity raises and valuations, while alternatively
pre-screening prospective companies and investors who could pose
systemic future risks by issuing misleading disclosures or fabricating
unaudited financial statements. Given these much higher stakes there
are many regulatory hurdles required with equity crowdfunding and the
SEC is the chief governing body establishing, regulating, and
overseeing the rules which will guide the future of equity
crowdfunding as an industry. Many of these hurdles were expected to be
eliminated following the passing of the JOBS ACT. The first piece of
the Jobs Act went into effect this past September. It ultimately
relaxed long outdated depression-era rules that previously banned
companies from advertising investment opportunities to the public.
However, the more fundamental aspect actually allowing small
businesses to sell equity via crowdfunding to non-accredited
investors, has been delayed on multiple occasions with the most recent
target date recently being pushed back until October 2015. Thus, the
regulatory uncertainty left many equity crowdfunding platform
companies in limbo unsure of the ultimate industry rules and
regulations governing non-accredited investors. In the U.S an
accredited investor is defined as person possessing a net worth of at
least one million US dollars, (not including the value of their
primary residence) or alternatively have income at least $200,000 each
year for the last two years (or $300,000 together with their spouse if
married) and have the expectation to make the same amount this year.
Thus, while cautious equity crowdfunding companies waited on the
sidelines for the equity crowdfunding industry to take shape and only
hesitantly embarked on soft-launches; more savvy equity crowdfunding
firms, like SeedInvest, realized that there was nothing stopping them
from launching prior to the SEC finalization of the JOBS ACT so long
as only accredited investors were targeted. So while everyone else
awaited for non- accredited regulations, SeedInvest raised the bar and
leapfrogged their potential future competitors by successfully
crowdfunding itself with a $4.2M Series A financing round while
building a market around crowdfunding private companies to their
network of accredited investors. Thus, investment bankers with
foresight and other Angel investor networks willing to adapt realized
that while the JOBS ACT would surely be a global game-changer once the
treatment of non-accredited investors were legally defined, the very
same platform utility concepts designed for the general masses could
be intermittently used for targeting smaller niche(s) of wealthy
investors seeking private placement investments. Overtime, it is
believed that the amount of attention focused on crowdfunding will
lead to eventual economies of scale. The benefits of scalability could
thus lead to a renaissance in investment banking and venture capital
investing, with a far greater focus on investments made in companies
at far earlier stages of the investment spectrum.

What is Crowdfunding? A history and Beyond! Author David Seaton

Michael Seaton, a crowdfunding expert 

If you have any interest in crowdfunding your own project, this outline
will help answer some of the following questions:

What is Crowdfunding?

When did Crowdfunding start becoming an international phenomenon and
what’s its orgins?

What is the difference between Rewards Crowdfunding and Equity Crowdfunding?

What are the top Crowdfunding companies?

What are the different types of Crowdfunding Projects?

What are the main things to consider when launching a crowdfunding project?

What are the major differences between the various crowdfunding platforms?

What are the risks and benefits of launching a Crowdfunding project?

What are the most successful Crowdfunding Projects?

Crowdfunding(s) Nascent Industry Beginnings:

Crowdfunding is the practice of funding a venture by raising monetary
contributions up-front, typically via the internet, in exchange for
REWARDS/PRODUCTS (Rewards Crowdfunding) or COMPANY EQUITY (Equity
Crowdfunding) after the project funding has been finalized.

The crowdfunding model theoretically requires three essential parties:

1.      Entrepreneur – The entrepreneur is the person, company, or
organization responsible for initiating, designing, and launching the
crowdfunding project to be funded while also the primary entity held
accountable for delivering results in line with stated expectations.

2.      Crowdfunder – The (Crowd) Funder(s) are the individuals or
groups who financially support the crowdfunding project and monetarily
pay in exchange for either rewards (in the form of products or
services) or equity (pre-defined ownership stake).

3.      Platform – The crowdfunding (Platform) organization bridges
the gap between the two parties and serves as the face of the
crowdfunding project while also moderating a basic framework for
governance. The platform provides central funding networks, credit
card processing services, and other value-added crowdfunding community
resources.

History of Crowdfunding:

While Crowdfunding may seem to have only recently caught the world by
storm after receiving global recognition following the bi-partisan
passing of the 2012 JOBS ACT (Jumpstart Our Business Startups Act), in
actuality the concept of crowdfunding has early roots dating back
100’s of years. One distinct predecessor to our more formal concept of
crowdfunding were the many collective fundraising or praenumeration
subscription models, used in the early 17th century to finance
publications that were planned, however not yet fully financed or
printed.

Praenumeration was a very popular practice used in Germany during the
18th century for the book trade business. The process allowed the
publisher to sell a discounted book that was planned but not printed,
thus ultimately reducing financial risk by allowing publishers to
cover their costs up-front. Magazines were the best fit for the early
practice, since beyond serving as a source of financing the
praenumeration process also predicted in advance the broader level of
reader interest and subscription demand.

Early documented examples of crowds funding projects incrementally are:

John Taylor – John Taylor entered the book trade in 1612 and regularly
maintained publications of published works such his 1618 travel book
titled The Penniless Pilgrimage. It is believed that part of the
agreement to write the book required that Taylor conclude his journey
only relying on unprompted hospitality offers, while funding
publishing costs through consumer subscriptions.

Joseph Pulitzer – Joseph Pulitzer was a famous newspaper publisher who
urged the American public to participate in the completion of the
pedestal on the Statue of Liberty in 1884. Through his newspaper
column Pulitzer raised over $100,000 in six months. More than 125,000
people contributed to the cause in small amounts, with the
overwhelming majority of donations coming from working class Americans
in small amount of less than $1.

Johann Heinrich Zedler –  Johann Heinrich Zedler decided to issue a
collection of works  by Martin Luther. He subsequnetly advertised that
the book would be for sale through Praenumeration at the Leipzig
Easter Fair in 1728, with the first volume to be available at the
following Michaelmas Fair in early October. When the eleventh and
final volume was issued in 1733, Zedler found himself in difficulty.
He had been using Praenumeration payments for the future volumes to
pay the bills for previous volumes, and now the last bills were due
with no future payments available to cover them.

Crowdfunding Progression:

The next progression of Crowdfunding is the cooperative movement of
the 19th and 20th centuries. This grass-roots movement saw collective
groups, such as community or interest-based groups pooling their
subscribed funds to develop new concepts, products, and means of
distribution and industrial production, particularly in rural areas of
North America.

Crowdfunding Genesis:

The formal geneses of crowdfunding as a nascent industry began shortly
after the bursting of the Dot.Com bubble with the development of the
first dedicated crowdfunding platforms. However, it is widely believed
that the first modern day of Crowdfunding project success story
occurred in 1997 after the rock band Marillion were unable to afford
their touring expenses following the release of their seventh album.
Thus, their loyal American fans used the internet to raise $60,000 so
they could play in the US. Although the band wasn’t involved in the
first round of fundraising, they have since used the same techniques
to successfully fund the production of their following three albums.
Since then the music industry in particular has probably done more to
promote the inherent virtues of crowdfunding than any other specific
group.

Early Crowdfunding Success Stories:

Other creative projects soon followed suit, and the first crowdfunding
website platform officially went LIVE in 2001. Crowdfunding gradually
gained traction in the U.S as ArtistShare became the first online
fully dedicated crowdfunding platform. Subsequently,  crowdfunding
platforms like as ChipIn (2005), EquityNet (2005), Pledgie (2006),
Sellaband (2006), IndieGoGo (2008), GiveForward (2008), FundRazr
(2009), Kickstarter (2009), RocketHub (2009), Fundly (2009), GoFundMe
(2010), Microventures (2010), SeedInvest (2011) and Fundageek (2011)
followed suit, along with another 1,000+ other crowdfunding websites
presently in existence.

Other notable examples of early modern day crowdfunding success stories include:

In the film industry, independent writer/director Mark Tapio Kines
designed a website in 1997 for his then-unfinished first feature film
Foreign Correspondents. By early 1999, he had raised more than
US$125,000 on the Internet from at least 25 fans, providing him with
the funds to complete his film.

In 2002 the “Free Blender” campaign was an early software crowdfunding
precursor. The campaign aimed at open-sourcing the Blender raytracer
software by collecting $100,000 from the community while offering
additional benefits for donating members.

Electric Eel Shock, a Japanese rock band in 2004 raised £10,000 from
100 fans (coined as the Samurai 100) by offering them a lifetime
membership on the band’s VIP guest-list. Two years later, they became
the fastest band to raise $50,000 utilizing SellaBand.Com.

Franny Armstrong created a donation system for her feature film The
Age of Stupid.Over five years, from June 2004 to June 2009 (release
date), she raised £1,500,000.

In December 2004, French entrepreneurs and producers Benjamin
Pommeraud and Guillaume Colboc, launched a public Internet donation
campaign  to fund their short science fiction film, Demain la Veille
(Waiting for Yesterday). Within a month, they managed to raise €17,000
online, allowing them to shoot their film.

The highest reported funding by a crowdfunded project to date is Star
Citizen, an online space trading and combat video game being developed
by Chris Roberts and Cloud Imperium Games. As of 19 November 2014—the
group claimed to have raised $61,000,000, beating the previous record
of $10,266,844 set by Pebble Watch.

Another highly successful campaign was initiated by the Tile App
Company that raised US$2.6 million by July 2013 on the Selfstarter
crowdfunding platform. The startup was only looking for $20,000 to add
to the $200,000 support it had received from Silicon Valley
accelerator Tandem Capital. The Tile product is a small device that
can be attached to items such as keychains, bags and bikes while
assisting users to locate lost items through the APP interface.

One of the most well-known crowdfunding success stories is Oculus VR
which launched on Kickstarter. Shortly after finalizing their rewards
based crowdfunding project Oculus VR was snatched up by Facebook for
with an insane $2 billion valuation.

Crowdfunding Industry Size and Projections:

In 2013, the crowdfunding industry grew to exceed $5.1 billion
worldwide. In all, crowdfunding platforms successfully funded over 1
million projects to the accord of $2.7 billion in 2012. This figure
more than doubled in 2013 to $5.1 billion expected for 2013. While it
is widely believed that by 2025, the global crowdfunding market could
reach nearly $100 billion.  This past year Kickstarter alone surpassed
over $1 billion in pledges made through their rewards crowdfunding
website. A May 2014 report, titled “The State of the Crowdfunding
Nation”, claims that during the month of March 2014 alone, more than
US$60,000 dollars were raised on an hourly basis via global
crowdfunding initiatives. With over 442 crowdfunding campaigns being
launched globally on a daily basis during this same time frame.

Crowdfunding Classifications:

Given the increasing popularity of so many diverse crowdfunding
projects the limits on its taxonomy of uses are rapidly being pushed
to the very far extremes. Initially the most popular form of
crowdfunding projects where related to artistic projects and other
social cause-based ventures. However, the scene was rapidly overtaken
by start-up companies launching unique products, as now even the most
main stream companies and ideas are entering the fray. The overall
success of crowdfunding has recently led to an explosion of projects
and dedicated platforms ranging from crowdfunding for New Breasts
Implants and Funeral Expenses, to “CrowdFund You” which funds people
instead of just projects, in return for pre-determined portion of the
project initiators future income back to investors for 5-10 years down
the road.

The plethora of crowdfunding websites has led to a natural outgrowth
of platforms spawning into entirely distinct entities while targeting
divergent niche markets. Crowdfunding is being experimented with as a
primary financing mechanism for creative work like blogging,
journalism, music, independent film, and for early-stage startup
company funding.