What is Crowdfunding?
Crowdfunding is the raising of funds through the collection of small contributions from the general public (known as the crowd) using the Internet and social media. Crowdfunding has its origins in the concept of crowdsourcing, which is the broader concept of an individual reaching a goal by receiving and leveraging small contributions from many parties.
The key to crowdfunding in the present context is its inextricable link to online social networking and its ability to harness the power of online communities in order to extend a project’s promotion and financing opportunities. The non-profit sector was the first to successfully employ crowdfunding in its present online form.
More recently, crowdfunding is becoming an increasingly common form of raising funds in the technology and media industries; including music, film and video games. Traditionally, crowdfunding is used to raise money to fund the development of a well-defined, singular project. The new form of crowdsourced private financing has lowered the barriers to entry not only for financing projects, but also for the average citizen to play the role of investor. Crowdfunding also has a unique dual function of providing both private financing and generating publicity and attention for a project.
- In April 2012, Massolution/ Crowdsourcing LLC released the first-ever profile of the global crowdfunding industry in its Crowdfunding Industry Report.
- In the last six years have seen unprecedented growth in crowdfunding, with the growth in the number of crowdfunding platforms reaching 54% in 2011 and set to reach an estimated 60% in 2012.
- According to the same study, north America and Europe are the two most active markets for crowdfunding, with north america currently representing the largest market in terms of the volume of funds raised, at a total of $837 million (USD) for 2011.
- By contrast, of the world’s 1,187,000 total successful crowdfunding campaigns, the majority originated from Europe (654,000), exceeding the number originating in North America (532,000).
Donation / Reward
- Among the three crowdfunding models, the donation Model or reward-based model currently represents the largest crowdfunding category worldwide in terms of the number of existing platforms.
- Indeed, a recent market research study by Daily Crowdsource shows that 93% of campaigns launched globally in 2011 were rewards-based where only 7% were investment-based.
- Similarly, 83% of funds raised globally in 2011 came from reward-based campaigns and only 17% was raised through investment-based campaigns.
- By contrast, only one-third of the global Donation Model campaigns have raised over $5,000 (USD), and a mere 10% have raised over $10,000 (USD).
- Lending-based crowdfunding also accounted for $522 million (USD) of the crowdfunding monies raised globally in 2011, making it the second-largest form of crowdfunding in terms of the amount of money raised. According to Massolution/Crowdsourcing LLC, Lending Model campaigns tend to reach completion in half the time it takes for Investment Model campaigns.
- The Lending Model is similar to micro-financing schemes common in developing countries or micro-lending platforms, such as Kiva, which allow individuals to solicit and provide micro-loans to support individuals or communities in developing countries or support small businesses. These micro-lending platforms have helped pioneer the concept of individual investment through micro-lending.
- Traditional Lending Agreement – standard terms are used and there is an expectation for a monetary reimbursement in the form of interest. In this case, the loans may or may not be guaranteed, depending on the crowdfunding platform being used.
- Forgivable loan – contributions are reimbursed to the lender only if one of two possible conditions is met: a) if and when the project begins to generate revenue or b) if and when the project begins to make a profit.
- Pre-sales – the finished product is promised in return for the contributor’s pledge. In the case of a pre-sale lending model, the contribution amounts are determined according to an assessment of the fair market value of the product. In addition, larger contribution amounts are typically accompanied by a promise of more copies of the product equal to the value of the amount of the contribution.
Investment (or Equity-based)
- The Investment Model has been the most successful model in terms of the number of successful campaigns and the average amount of money raised per campaign. For example, over 80% of the global Investment Model campaigns raised over $25,000 (USD) each.
- In addition, the Investment Model is generally seen to have the greatest potential for growth. Massolution/Crowdsourcing LLC predicts that the total global funding volume for crowdfunding will double in 2012, to $2,806 million (USD) from an estimated $1,470 million (USD) in 2011. Of this, they predict a 300% growth in the Investment Model, a 75% growth in the Lending Model and a 50% growth in the Donation Model.
- The Investment Model poses a number of problems, including breaches of securities regulations and also raises questions about IP ownership and creative control. Furthermore, crowdfunding is a model that was built for and is best suited to financing one-time projects rather than providing capital.
- There have been a number of creative hybrid models that combine donation, lending and/or investment models together. Innovative distribution rights models have also appeared that allow investors to participate in profit sharing without following a traditional investment model which is currently not legally permitted in Canada.
CMF – Crowdfunding in a Canadian Context (Aug 2012)
Massolution/ Crowdsourcing LLC (Industry Report April 2012)