Thoughts on Crowdfunding and Social Commerce

Ever wanted to get a project off the ground, provide resources to people in need, create new products but felt your resources were finite to accomplish the task? With crowdfunding your resources are not as finite as you might think.

Crowdfunding is a variant of crowdsourcing. Crowdsourcing is when a task is outsourced to a group of individuals in the form of an open call. Crowdfunding on the other hand is when the crowd collectively pools their financial resources together to support the endeavors of other individuals and organizations.

Some platforms use both crowdsourcing and crowdfunding in tandem. Examples, include Sellaband, IndieGoGo and Cameesa. Others use crowdfunding exclusively, an example is Fundable.

This article will outline today’s crowdfunding landscape and will reference crowdsourcing where required as the topic is thoroughly covered by others.

The core idea of crowdfunding is not new. Groups of people have donated to political campaigns and charities in the past. There are a number of notable developments that helped evolve crowdfunding as we know it today. The first development is the idea of micro-financing, popularized by Nobel Peace Prize winner Muhammad Yunus. The most powerful idea to come out of micro-finance is that small amounts of money can go a long way. Micro-financing in and of itself is not crowdfunding unless the resources are provided by a community as in the case of Kiva. The second development is the success of crowdsourcing and the participation of communities around a shared passion or area of interest. The ability to build virtual communities on the Internet is an integral component of this. The last item is the infrastructure surrounding secure payment processing online through PayPal, Braintree and countless others. The other part of this equation is the ubiquity of credit and debit cards that facilitate many online transactions processed today.

There is some confusion surrounding crowdfunding. There are many platforms that use it in different ways. This article will outline some of the ways it’s being used.

The Crowdfunding Landscape

Currently there are three main types of crowdfunding platforms:

1.    Fundraising
2.    Micro-lending
3.    Product Development

Below is a listing of platforms that fall into the above categories

• Fundraising

• ActBlue
• firstgiving
• Fundable
• PledgeBank
• The Point

• Micro-Lending

• Kiva
• Zopa

• Product Development

• A Swarm of Angels
• Artist Share
• BeerBankroll
• Cameesa
• catwalk genius
• Chipin
• IndieGoGo
• Nvohk
• Sellaband
• SliceThePie
• Spot.Us
• Vencorps

Micro-lending

As with all lending arrangement there is a borrower and a lender. With crowdfunded micro-lending platforms a community of borrowers post their requests. Requests document the amount of money required, how the funds will be used and the rate. Lenders provide portions of the requested amount until the goal is reached. Principle and agreed interest is repaid to the lenders.

Popular applications in this category include Zopa and Kiva. The European based Zopa allows individuals to request loans for items such as credit card consolidation, tuition, home repair, etc. A pool of lenders fulfills these requests. Kiva has the same model but is geared to a different demographic. The major difference is that Kiva is a non-profit geared towards third world entrepreneurs.

Prosper and similar bidding for a loan sites do not engage in crowdfunding. The individuals are competing to be the lender of choice. The loan in this scenario comes from one individual and not the crowd. A platform such as Virgin Money is also not crowdfunding. It allows individuals to obtain legally binding loans or debt instruments typically provided by a bank from friends and family. Although the funding comes from more than one individual it is not crowdfunding because the request for the loan does not come in the form of an “open call” but from the borrower’s own private social network.

Product Development

Crowdfunding in product development has gained popularity in the arts, movies, music and fashion. Money is provided by the crowd for the creation of a product such as a movie, a musical album or a t-shirt. Typically, the community that funds an item gets the product and some form of profit sharing from sales of the product. If the amount is not reached to produce the product the funds are returned. This form of crowdfunding presents the least amount of risk as compared to micro-lending and fundraising. In micro-lending there is always the possibility one will default on a loan and in fundraising there is always the risk of fraud. In both instances nothing is returned to the funder. (Note: In the case of Kiva defaults are rare and the act of lending is altruistic. If the money is not returned you consider it a donation to a good cause. However, when the money is returned it means the entrepreneur succeeded in building a more sustainable business which is positive as well.)

This form of crowdfunding for product development is typically paired with crowdsourcing. The crowd supplies ideas or products to produce. Then the crowd proceeds to fund what they feel should get produced.

Some notable examples include Sellaband where $10.00 is the minimum to back a musical act. The total amount to be reached is either $50,000 or $100,000. These are the production costs involved in producing professional album. The funder, called a believer in the community receives a limited edition CD and shares in sales revenue.

Cameesa operates in a similar fashion but on a smaller scale. The costs of putting a t-shirt into production are far smaller. Funders, called supporters on the Cameesa platform, support artwork to be produced on t-shirts in $20 dollar increments until it reaches $500. Once it does the artist is paid and the t-shirt goes to print. The supporter receives a limited edition tee in addition to share of the revenues from sales.

Why use crowdfunding for product development? Isn’t crowdsourcing enough? The short answer is crowdfunding may provide a better mechanism to forecast consumer demand as individuals “put there money where there mouth is”. If they are willing to fund a product they are more invested in the success of the product as opposed to the crowdsourced model of simply voting. Individuals are not as invested in a product with a vote. Although the voting does the job well on many crowdsourcing sites, especially when the products are information. Crowdfunding may better forecast actual demand which is important in the context of product development.

Fundraising

Fundraising is the most flexible form of crowdfunding as individuals can create an assortment of campaigns for the crowd to fund. However, some platforms have a specific focus whether it be political or non-profit donations. The benefits for the funder are usually dictated by an individual posting the campaign. If the funder finds the terms or objective suit them they donate. Fundable and The Point are notable examples from this group.

Other Platforms

There are also software vendors that set-up fundraising software for institutions, such as Blackbaud. I have left them out as they are enablers of crowdfunding or fundraising which can be used to build a crowdfunded community.

We can make a difference.

Crowdfunding is empowers individuals to collectively begin repairing third world economies, raise money for important causes, create the products consumers want, further artistic endeavor, etc. Technology and crowdfunding platforms have made it easier to make a contribution a long side a group of people. I personally haven’t been able to accomplish all that I have without the help of others. With crowdfunding you are not alone. You are part of a collective that can influence change.

Going Forward

My goal with this blog is to document the developments in crowdfunding in addition to the platforms that make crowdfunding possible. I will provide an overview of each of the projects in the space in addition to new entrants.

If there are any platforms I’ve missed or if you have any interesting crowdfunding applications you’ve come across feel free to email me at….

iam [at] viktorbezic.com.