‘Lots of small contributions are aggregated online to support artistic or creative endeavours’
The Economist’s first attempt at describing crowdfunding in 2010 may have lacked a certain creativity, but to a readership still living in the Venture Capital desert created by the financial crash, this new phenomenon was an exciting prospect.
A fairly standard formula has now emerged as the norm for crowdfunding campaigns. Aspiring entrepreneurs post their idea on a platform like Kickstarter, with flashy promotional videos and posters. They can also offer different reward tiers, which backers who pledge money to the project can access by giving differing amounts. Every individual project has its own funding goal and deadline, by which it will either be successfully backed or banished to the ever-growing scrapheap of failed startups.
Kickstarter is undoubtedly the flagship brand of the crowdfunding movement and, while it provides a convenient marketplace for backers and entrepreneurs to meet, the true genius of the platform is in its interface. Upon opening the Kickstarter website, you are asked what you want to ‘explore’. Individual projects have a pulsating ‘percentage funded’ bar with an ominous countdown to the deadline next to it. The entire experience has a sense of urgency mixed with a fear of missing out that is especially enticing to impulse buyers. It is no surprise then that while repeat backers make up only 24% of the overall Kickstarter population, they contribute on average 63% of the funding to each project.
‘The promo video is a bit too slick and looks like the project is already done’
This was the rejection feedback received by the entrepreneurial duo behind a 2010 Kickstarter campaign which sought funding for their US$15 iPhone 4 tripod. Although they eventually raised $70,000 from strangers looking for an easier alternative to hands, the pair had to comply with the Kickstarter ethos of ‘journey building’. The crowdfunding platform’s team made it clear in their first mission statement that they didn’t simply want Kickstarter to be an Amazon for startups. The goal was to be an alternative for creative innovators and artists who could not access venture capital through hedge funds or traditional ‘big whale’ investors. As such, they wanted Kickstarter campaigns to be the ‘diamonds in the rough’ which backers could see potential in.
A lot has changed since 2010.
In 2015, ‘Pebble Time’ posted what many would recognise as a sporty precursor to the Apple Watch on Kickstarter. It turned out to be the most highly funded project to date and reached its funding goal of $1M in 43 minutes, hitting $20.4M by the end of its 30-day sponsorship deadline. The lowest contribution, of $159, gave backers access to the basic model while optional extras could run backers up to $5000. At the time of posting, Pebble Time was a finished product with production deals already in place, set up by a company which had already released several successful products. The 43-minute record is undoubtedly impressive, but was the result of months of hype building on social media which the already well-established company spent thousands of dollars on, including a promo video that was nothing if not slick. The project was by no means alone in its professionalism and represented a shift in Kickstarter’s philosophy; ‘startups’ were effectively using the platform as a payment facilitator along the same lines as PayPal.
While it could be argued that the company is simply expanding its business model, more cynical observers point towards the company’s fee structure. Like any investor, Kickstarter works in percentages. Although its compensation varies slightly from project to project, the platform generally takes an 8% cut from the pot of crowdfunded money that entrepreneurs are able to raise. In an environment where only 36% of projects reach their funding goal, Kickstarter is unlikely to object to projects like ‘Pebble Time’ even if they are not startups in the traditional sense, especially when they bring in $1.6M in commission.
‘Crowdfunding may turn out to be a fad’
In a 2010 interview with The Economist, financial commentator Cory Doctorow predicted that crowdfunding was unlikely to become a viable alternative to venture capital, but the numbers really speak for themselves. Kickstarter alone has raised nearly $4bn across 150,000 funded projects, but beyond crowdfunding’s success in opening up new streams of capital for startups, it has the potential to help developing economies in ways which traditional government policy and foreign aid have been incapable of.
The factors hindering economic growth in developing countries are many, but whether you believe that the solution lies in improving healthcare, education, or something else, the problem connecting them all is a lack of available funds. The productivity problem especially prevalent in rural Africa and South East Asia is a direct result of the region’s poorly developed formal banking system. Farmers and small business owners who could exponentially increase their output through relatively minor investment in capital equipment face interest rates exceeding 50% from small local lenders. These lenders must charge such high rates because of the risk involved in informal lending, where collateral is non-existent.
Peer-to-peer lending like this shares many characteristics with loan sharking and can have similarly violent debt collection methods. While other, limited, opportunities in equity-based investment exist, many entrepreneurs with the technical knowledge to make improvements to their businesses lack the financial skills necessary to evaluate proposals. Instead, crowdfunding with a charitable intent opens up new opportunities for small businesses to expand, with funds raised through a mix of loans and donations.
One platform, ‘Kiva’, which specialises in raising funds for small businesses in developing countries, has also seen remarkable growth in the crowdfunding sector. Self-proclaimed ‘innovative charities’ come and go, but since its conception in 2010, Kiva has facilitated over $1bn in loans to small business owners in Africa, Asia, and South America. By choosing which projects to invest in directly, the effects of contributions are a lot more visible to backers than simply donating to an established charity. Furthermore, the small scale of contributions to individual projects means that risk is better dispersed than in peer-to-peer lending. UNICEF prides itself on its low operational budget, where only 11.6% of donations are used for administrative purposes, however even this is still high compared to Kiva’s 2.9% transaction fee - the bare minimum, it claims, to keep its servers operational.
‘The VC ecosystem appears healthy and driven’
While crowdfunding has made an impressive impact in a short timeframe, traditional venture capital funds are as strong as ever; 2017 saw the highest investment in startups since the dotcom bubble, with $84.2bn going towards entrepreneurs in the United States alone. But the rising popularity of crowdfunding does represent a milestone in the democratisation of the modern economy. Countless hours of media coverage have been given to new employment opportunities in the gig economy, but in many ways Kickstarter and its peers are the next stage in the consumer revolution; where the consumer role deepens from merely browsing shop shelves to having a say in the very conception of products. Maybe one day, large firms with development departments and test groups will be a distant memory.