The concept of crowdfunding requires no more proof.
Sites such as Kickstarter and local ventures including Pozible have shown consumer advocacy for projects funded by the crowd endures. In 2013, Kickstarter backers pledged $US480 million for various projects – the trend is not a flash in the pan.
But the notion of crowdfunding has gone beyond simply paying companies for products in advance. Legislation already passed abroad and on the horizon in Australia will transform the model from a funding procedure into a way to distribute equity for start-ups.
And not only is crowdfunding changing the manufacturing process, but similar programs are showing how consumers are having more direct input in how things are made. Those consumers who have given money for various enterprises now expect constant updates and ratification about their choice – even though it’s not technically an investment.
So while the crowdfunding trend will continue to grow, it will also transform according to consumers’ expectations – more information and transparency will be required just not for crowdfunded projects, but for all digital enterprises.
And businesses must be aware of how to adapt in response.
The changing nature of crowdfunding
The crowdfunding concept has transformed since its inception. Once used as a tool for those in the arts industry to fund projects that would not otherwise survive, the concept has now extended to business models.
Not only have manufacturing businesses been able to start entire enterprises with Kickstarter campaigns – such as the Pebble watch – businesses are now using the crowdfunding method as a business plan in and of itself.
Double Fine, an interactive game development studio, was the first to break the $US1 million barrier on Kickstarter in 2012. Since then, several others have managed to produce successful campaigns. The manufacturers behind the Pebble smartwatch began on Kickstarter, while other, smaller projects such as accessories have managed to succeed as well.
Features films are among the success stories, and the interactive games industry has been the most successful – Cloud Imperium Games has managed to raise in excess of $US20 million with a large portion of that coming from Kickstarter, the rest from direct contributions via PayPal.
Kickstarter and crowdfunding is just a natural extension of direct access provided by the internet. Entertainment is now being distributed in several different models, including the “pay what you want” and direct distribution. Stand-up comedians have made a significant amount of money by posting their material on websites for a flat fee without any distribution charges, a model that is now being copied by several other entertainers.
So it is with Kickstarter and other crowdfunding methods. But the nature of crowdfunding is changing, and this will become a distinct theme in 2014.
But how is crowdfunding changing?
Apart from just becoming more successful and opening up other avenues of business for enterprises, the way in which crowdfunding will start distributing equity is of direct importance for digital businesses.
An Australian platform for popularised equity crowdfunding is set to launch next month, after several different models having already pioneered the method in both Britain and the United States.
The lack of an equity crowdfunding platform in Australia has drawn criticism from some start-up groups which say businesses have less of an avenue to gain money than in other countries. While a successful crowdfunding platform actually already exists – ASSOB – with over $100 million raised for various businesses, current regulations limit investments to 20 participants. The new laws regarding crowdfunding refer to a mass investment process.
VentureCrowd is set to launch in February, with pre-screened pitches able to secure funding from a huge crowd of investors.
“VentureCrowd will democratise the early stage finance sector in Australia in a way that has never been done before,” Jeremy Colless, managing partner of VentureCrowd’s parent, Artesian, said in a recent Australian Financial Review article.
Crowdfunding has often been interpreted as a type of “pre-order” for a product, with the line between financial advocacy and involvement thin. This will help properly define that line.
Moreover, the concept of crowdfunding has gone beyond enterprises and is now focused on individuals. Sites such as Patreon are gaining steam for funding individuals directly for their own work, rather than the work of an enterprise or project.
While mainly focused on the arts, patrons are able to fund writing or other types of art for a certain number of instalments per month.
The direct funding is simply an extension of what’s happening in the professional media industry, with publications such as The Dish run by Andrew Sullivan having already explored a paywall model based on the personality of the creator, rather than the publication as a whole. This trend will continue in 2014 as the distinctions between enterprises looking to gain equity, businesses hoping to fund a new project and individuals wanting backing for their own continues to become more well-defined.
So what does this mean for everyone else?
The changing nature of crowdfunding is transforming not only business’s way of getting projects off the ground, but will also reconstruct the way consumers think and interact as well.
Several trends need to be monitored:
- Transparency is key. The most successful Kickstarter projects gain a good reputation because the administrators are honest and forthcoming with their financial “backers”. As the role of social media continues to grow within business, that transparency will be expected across all avenues of business – not just in crowdfunding. Digital businesses need to expect a higher level of transparency is expected, even when it may not always be required.
- Consumers value personalities. The trend towards crowdfunding personalities on sites such as Patreon, and the instances of funding key personalities in the media industry, is endemic of a shift towards supporting people rather than enterprisers. (This is also why Kickstarter campaigns with the best-produced videos usually end up successful – people want to see who they are backing, rather than just what). Such a shift is key for businesses. With Google also prioritising authorship on blog posts and content, digital enterprises need to find key personalities within their own businesses they can highlight. The more personalities on social media and on the web customers can connect with, the more likely they will attach themselves to whatever is being sold or advertised.
- Crowdfunding is not for everyone. With the growing number of crowdfunding models becoming available, including crowdfunding to distribute equity, it will become increasingly difficult for well-funded businesses to justify asking consumers for money. (This has already occurred with film-making projects). Businesses will need to consider whether crowdfunding ventures is appropriate, particularly if they already have enough funds to see a project through. Consumers won’t tolerate crowdfunding being used as a way to reduce financial risk.