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.

Philanthropy and projects: Crowdfunding and Beyond by David Seaton

The social and philanthropic nature of crowdfunding is what originally
drove a great deal of the initial popularity prior to main stream
adaption. A variety of crowdfunding platforms have emerged to allow
ordinary web users to support specific philanthropic projects without
the need for large amounts of money. Global Giving allows individuals
to browse through a selection of small projects proposed by nonprofit
organizations worldwide, donating funds to projects of their choice.
Microcredit crowdfunding platforms such as Kiva (organization) and
Wokai facilitate crowdfunding of loans managed by microcredit
organizations in developing countries. The US-based nonprofit Zidisha
offers a new twist on these themes, applying a direct person-to-person
lending model to microcredit lending for low-income small business
owners in developing countries. Zidisha borrowers who pass a
background check may post microloan applications directly on the
Zidisha website, specifying proposed credit terms and interest rates.
Individual web users in the US and Europe can lend as little as one
dollar, and Zidisha’s crowdfunding platform allows lenders and
borrowers to engage in direct dialogue. Repaid principal and interest
is returned to the lenders, who may withdraw the cash or use it to
fund new loans. A firm called DonorsChoose.org allows public school
teachers in the U.S to request materials for their classrooms.
Individuals can lend money to teacher-proposed projects, and the
organization fulfills and delivers supplies to schools. There are also
a number of own-branded university crowdfunding websites, which enable
students and staff to create projects and receive funding from alumni
of the university or the general public. Several dedicated civic
crowdfunding platforms have emerged in the US and the UK, some of
which have led to the first direct involvement of governments in
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.