Just What Is Crowdfunding?

Crowd funding

Crowdfunding is basically a way to raise funds for a project using a group of individuals as opposed to a more traditional venture capitalist arrangement. Instead of one person or a few people funding your project with a lot of money, a lot of individuals fund your project with a small amount of money. The crowd part of the term comes from the fact that a ‘group of individuals’ are each giving you a small amount of money.

The concept is great because it allows lots of people to become financial supporters of great ideas without spending lots of money.

It differs slightly from micro-financing because crowdfunders don’t usually get their money back. Instead, they purchase a ‘pledge’ which generally entitles them to something if the project is successful.

I hear you then say, “What constitutes a project?” and “How does it become successful?”.

Most crowdfunding platforms have rules around valid projects and many such platforms were spawned out of the creative arts or new invention areas where it has traditionally been hard to get funding. Let’s assume your project fits the rules of the crowdfunding platform (maybe you have invented a new gadget that does something special) and you post a project. Generally, you post the project for a period of time and let’s say that is 60 days and you set a target dollar value to reach. You then have 60 days to promote your project to would-be funders (and many project operators are clever at this and don’t just assume the crowdfunding platform will do the work for them – they work their butts off through social media, etc. to seek out funders).   A project is deemed successful if at the end of  the time period (in our example 60 days) they have raised the funds they wanted.  At this point, the crowdfunding platform will charge all those who purchased pledges, the appropriate amount of the pledge.  It is then up to the entity whose project it is to complete their project and send out pledges. Some pledges are as simple as a postcard in the mail while others might be an actual product (one of the ‘gadgets’ in our example).  The crowdfunding platform makes their money by taking a percentage of the value of the funded project.

Because the web has access to many, many users (the crowd), it has made the concept of crowdfunding much more accessible.

One of the first entities to try crowdfunding on the web was Kickstarter who are based in the US.  At the time of writing this, they said on their website “Since our launch on April 28, 2009, over $450 million has been pledged by more than 3 million people, funding more than 35,000 creative projects.”  That is phenomenal.  More about how Kickstarter specifically works can be found from that same page.  At the moment, they are saying you need to be a US or UK resident in order to use Kickstarter but this will be changing constantly so check for up-to-date information on that.

GoFundMe is another crowdfunding platform. Their rules are more open and allow people to raise funds for charity and personal reasons. In fact, their emphasis appears more related to fundraising as opposed to project capital raising.  They say, “Supported countries and currencies include: United States of America ($USD), United Kingdom (£GBP), Canada ($CAD), Australia ($AUD), and European Union countries that use the Euro as their official currency (€EUR).”

In Australia, Pozible was one of the first web-based crowdfunding platforms. Rick Chen and Alan Crabbe are Pozible’s Directors and Co-Founders.  I went to a face-to-face forum here in Brisbane last year and it was clear that the people behind Pozible are passionate in helping people have successful projects. They showed particular interest in creative industries projects which is not unusual given Pozible was borne out a need for a struggling artist  to fulful their dream financially.

You no doubt have lots of other questions such as “How do you know if you will receive your pledge?”, etc. Each of the platforms have different ways of handling this so you need to visit their websites and read up. But remember, most of the time it is not the pledge that drives the crowdfunder but rather the altruistic feeling they get from helping someone turn a good idea into reality.

My only concern is how long will the rush last given crowdfunder fatigue must eventually set in?

Michelle Jansen

This article has been written by Michelle Jansen, Principal Ecommerce Consultant for CYBECOM. Michelle holds the qualifications of BAppSci (Maths & Computing), PostGradDip Business (Ecommerce) and GradDipEd (Middle Years). She has been consulting in Ecommerce since 1999 and has performed work for clients in all areas of business including SMEs and Corporates as well as State and Local Government.