The Evolution of Crowdfunding

I say boats, in the plural, because I didn’t miss jumping into the singular boat. I contributed to my first crowdfunding project on Kickstarter in March of 2010, giving $30 to The Word Project by Polly M. Law. It was an interesting project and concept and I was happy, as a fellow writer, to support someone else who obviously loved words. I sensed then that this was going to be an online organism that multiplied wildly.

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Now as for that flotilla of boats, even though I work at a firm that does digital marketing and has a wealth of online fundraising experience I just didn’t foresee the way this organism would mutate—especially in the realm of corporate involvement and self-directed giving for individuals.

This Didn’t Start With The Internet

The idea of crowdfunding has existed for a long time in different forms. Some would actually point toward Jonathan Swift’s Irish Loan fund in the 1700s as the precursor, a micro-financing fund that provided loans to low-income families in rural areas. By the 1800s, more than 300 organizations were participating in this fund as lenders. (As another example, you could say that taxes for highways, while not voluntary, are another form of crowdfunding that is practiced by governments.)

In 1885, the Statue of Liberty included a crowdfunding component to assemble and install the statue, raising $100,000 from more than 160,000 backers. In the current bestselling book by Daniel James Brown, Boys In the Boat, the citizens of Seattle and the state of Washington were so inspired by the performance of the University of Washington crew team that they crowdfunded the national champs’ trip to the 1936 Olympics in Berlin (where they won a Gold Medal, reward for all who contributed).

There are many other examples of similar crowdfunding efforts that all spin on the idea of turning small, individual gifts into sums based on scale.

Houston, We Have Liftoff

Crowdfunding rocketed with the web’s ability to conveniently amplify, connect and share. JustGiving in the United Kingdom began harvesting online donations in the year 2000. Online microfinance pioneer Kiva launched in 2005. In 2006, Michael Sullivan coined the term “crowdfunding” for fundavlog, an online effort to garner financial support for events and products related to videoblogs. In 2007, Indiegogo arrived on the scene, followed by Kickstarter in 2008.

Enter the Reward Economy

One major change during this time is that these alternative online funding tools popularized a new reward system, whereby contributors no longer expected to receive money back for their investment. They were now satisfied for a return on their investment that included a physical reward of some sort, perhaps a t-shirt or a product experience, along with a less quantifiable feeling of having helped someone out, often a kindred spirit in a similar line of work or producing a product in an area in which a contributor felt strongly about.

(Witness my personal crowdfunding contribution to the TiGR bicycle lock system project in May 2011 for a titanium lock as cool as your bike. I’m passionate about bicycling, the lock was indeed cool, and I contributed at a level that brought me two of the locks, then in development, as my “reward.” The project, which had a goal of $37,500, ultimately raised $108,065.)

Crowdfunding then started neatly organizing itself into niches—not a big change, but more of a vertical orientation around special interests. You can now use crowdfunding sites that range from funding disabled veteran startups (Vetstarter) to pet surgery (FundRazr). Even YouTube, while late to the party, started offering a crowdfunding service this year called “Fan Funding” as a way for viewers to support the YouTube creators they love.

The category has exploded, growing 1000% in just the past five years. It’s expected to pump $65 billion into the economy this year and create 270,000 jobs. (Source) Not bad for an industry that is still sucking on its pacifier.

What I Didn’t Foresee—Did You?

As I said earlier, I missed a few mutations—though rapid growth wasn’t necessarily one of them. For instance, who could have seen well-heeled celebrities such as filmmaker Spike Lee crowdfunding their movies? Or Neil Young and his digital music delivery system, PonoMusic, using crowdfunding in an effort to save the rainforest? I sure didn’t.

While the digital groveling of celebrities represents a mutation for sure—celebrity generally involves a mutation or two, doesn’t it?—it doesn’t qualify for the list my biggest mistakes in the category. Here are three permutations I completely missed: the morph of crowdfunding to serve the selfish interests of individuals; investors finding religion in crowdfunding as a trusted platform for making investment decisions; and the direct involvement of for-profit corporations—sometimes large ones—to employ crowdfunding as an adjunct to their traditional financing and marketplace operations.

Mirror, Mirror, on the Wall…

Let’s start with individual self-interest. I still find this hard to believe, but right now as you read this and are preparing to go to work and earn a hard day’s pay, people are relying on the largesse of friends and strangers to crowdfund girls’ weekends in Las Vegas, honeymoons in distant lands, and tuition for acrobat school, among others. If you have an affinity for funding the personal dreams of others, just take a stroll through appropriately named GoFundMe—Crowdfunding for Everyone!

Investors Sign Up for Fantasy Football

And how about the world of investing in startup companies? When the JOBS act passed in 2012, it enabled companies to use the same basic mechanics as individuals to crowdfund equity (and debt) investments. One of the leading platforms is AngelList, which so far this month has facilitated $9 million in startup investments. As an example of the creativity in this segment, AngelList enables you to put your money into individual companies, participate in funds where you invest in 100 startups at once, or join syndicates that allow you to back the investments of notable angel investors. That last one actually sounds a little bit like fantasy sports, doesn’t it?

We’re even seeing this in the space our firm specializes in, socially responsible businesses, as equity-based crowdfunding company CircleUp and venture firm Collaborative Fund have created a $4 million fund to invest in certified B Corps. This is one of the first funds focused on supporting great businesses that deliver profits and social impact.

It’s Not All About The Little Guys

Lastly, I missed the engagement of large corporations. Consider Marvell Technology Group, a publicly traded company with a market cap of $7 billion and annual revenues of $3.4 billion. Marvell used Indiegogo to test market demand and gain insights in product development for a software and hardware kit it was developing called Kinoma Create. It raised $52,000 from 500 backers who paid $599 each for early access to the product.

“We’ve gotten feedback from people and made adjustments to development plans for releasing [Kinoma Create] based on the response,” said Peter Hoddie, a Marvell vice president, in a Wall Street Journal interview. “It really does give Marvell some confidence in investing in this.”

Misfit Wearables is another example of strategically using crowdfunding to accomplish more than fundraising. Even though it had acquired $7.6 million in venture capital funding, it determined that Indiegogo would be a good place to prove out consumer demand for its fitness device, called Shine, and generate interest from retailers such as Best Buy. It surpassed its fundraising goal $100,000, hitting a total of $850,000. Based in part upon its successful crowdfunding performance, the company was encouraged to roll out distribution of its product in 32 countries internationally and raised another $15 million in venture capital.

“We’re not about the little guy,” Slava Rubin, the co-founder and CEO of Indiegogo, said to the Wall Street Journal. “If you’re truly democratizing a system—in this case fundraising—that means everyone has equal access to equal things.”

So What’s Next?

Well, I’d imagine there will be a few more mutations angling for a much-desired spot in my line of mistakes and oversights. But I believe I do see a couple of significant changes in the realm of philanthropy occasioned by the aftershocks of the big crowdfunding quake.

I see corporations, accustomed to taking marketplace matters into their own hands, actively using crowdfunding to better control their corporate philanthropy. Instead of waiting for traditional funding requests from nonprofit organizations, corporations will become increasingly comfortable with creating, and funding, their own causes. This offers the chance for enhanced measurement of results and engagement for employees and suppliers in company-created causes that align directly with the company’s strategic interests.

There are different flavors of this already taking place in the corporate world. (You can see one example of this in our blog about HP and its giving partnership with Kiva.) I believe this will become the norm as we move deeper into what many are calling “The Purpose Economy.”

This will lead to a second and related change in the nonprofit world. While nonprofits won’t abandon real-world direct asks, nor should they, their online development programs will go beyond the simple donate button on their websites to employ sophisticated online crowdfunding campaigns that use software to effectively mimic what are essentially offline crowdfunding campaigns—like the United Way’s annual appeal or the “friendraising” of YMCAs in their Strong Kids Campaigns.

Elbowing Our Way Into the Crowd

At Oliver Russell, we’re experimenting with our first crowdfunding project, a campaign on Kickstarter to raise funds to reboot Think Boise First, a “Get It Local” movement in our community. We’ll report our first-hand findings from the experience after the campaign concludes in late November.

And as for me, rather than just reporting from the sidelines about the crowdfunding movement, I’m thinking it’s time to enter the school of hard knocks and get some first-hand experience. Brother, can you spare a dime? Because I’m thinking of crowdfunding a trip to Iceland to soak in a geothermal hot springs under the Northern Lights this winter. It’s always been a dream of mine…

by Russ Stoddard & Oliver Russell

This article, “The Evolution of Crowdfunding” is republished with permission from Oliver Russell, which builds brands for purpose-driven companies.

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