|
|
Back in the 1960s, a clever but financially
disadvantaged fellow placed a small ad in a national magazine that read
something like: Money needed. Please send $1 to the address below. Do it today!
No specific need was given, and nothing was promised in return, so that fraud
could not later be charged.
Yet within a few months, thousands of dollars arrived
in his mailbox, a considerable sum in those days. Or so the urban legend
goes.
P2P Money
A half-century later, many things have changed, but one
thing remains unchanged: People still need money, and they have not ceased to
innovate ways in which to get it.
We have written extensively in this space about many of
the P2P Internet connections that are transforming the planet... in commerce,
in education, in the job market, and with business and social networking. The
list of possibilities is truly endless. For yet another example, the world of
money has been given a Red-Bull jolt by a fast-growing phenomenon known as
"crowdfunding."
Previously, if you had a grand scheme for a new product
or service and you needed seed money to get your project off the ground, you
had to save it yourself, borrow from friends and relatives, or go with
begging bowl to your local bank, which was unlikely to see you as the next
Steve Jobs. If it was a big enough idea, you might even attract the attention
of a venture capital (VC) company, but there you had to be prepared to offer
many pounds of flesh in return. And still, those ideas that didn't meet with
bank criteria (there's no collateral for a software startup) yet weren't
large enough for the VC crowd often fell into a no man's land, scraping out
some funding from unorganized, so-called "angel" investors, or
never getting funded at all.
More recently, we've seen the rise of for-profit
Internet alternatives to traditional lending, such as Prosper, Zopa,
and the market leader, LendingClub. These P2P companies specialize in small
loans – LendingClub's limit is $35,000. They
don't originate loans – they facilitate them, cutting out the banks and
creating a situation that allows individuals with spare cash directly to
invest in other people's dreams, while the dreamers can borrow based on the
public responses to their particular (hopefully compelling) stories. For each
loan, there is a multitude of lenders, not just one.
It's a win-win proposition. Borrowers receive
below-market rates with less hassle than is usually encountered at a
traditional financial institution. Investors get an excellent rate of return,
and can attenuate risk by building a portfolio spread across multiple loans.
And LendingClub prospers by taking a cut. The site
claims a very low default rate of less than 3% since its inception in 2007,
and it has been a monster success. To date, LendingClub
has negotiated nearly a billion dollars in loans, a meteoric ascent from
about $175 million just two years ago.
Other, more philanthropically oriented organizations
either are or function a little more like nonprofits. They solicit donations
in order to make very small micro-loans to budding entrepreneurs, primarily
in the developing world. Donors either simply get their money back, or the
principal plus a small amount of interest. Those that work this way include Kiva, Zidisha,
Fundable, PayPal's MicroPlace,
GlobalGiving,
FirstGiving,
CreateaFund, Calvert Foundation's Community Impact Investing, and the Grameen
Foundation, which received tremendous worldwide publicity when its
partner organization Grameen Bank shared the Nobel
Peace Prize with Muhammad Yunus in 2006.
At the other extreme – if you're an upscale
investor looking outside of the traditional markets for greater risk/reward
potential – there are alternatives for you as well, in the form of
secondary markets. Sites such as SharesPost and SecondMarket
provide access to participation in private placements and the purchase of
already existing, pre-IPO shares in privately held companies. These
opportunities are generally only open to accredited investors, i.e.,
those who can verify that they are high-net-worth individuals and attest that
they're comfortable with assuming a high degree of risk.
No quite so well-heeled? You can still play the game. MicroVentures was the
first Internet broker/dealer to help startups in the US raise capital in
exchange for equity. Companies can apply for up to $500,000, and individuals
can buy in with an investment as low as $1,000. There's also MediaShares,
which offers companies the opportunity to crowdfund
IPOs, and investors the chance to buy as little as a single share of stock.
The stock can be sold online, with or without an underwriter. A new US law
(H.R.1070) has been passed by Congress that will allow for advertising the
sale of stock to the general public and selling to non-accredited investors;
this is expected to greatly expand these types of online offerings. Crowdcube,
Grow VC, and Symbid
also finance business startups. SeedUps specializes in tech.
Clearly there are a lot of new and imaginative ways of
moving money around that vie for our attention. Many of them would be
considered crowdfunding (derived from the general
term "crowdsourcing," which has traditionally referred to works
like Wikipedia driven by large numbers of amateur contributors), since the
definition of this term still tends to be on the loose side. It can be
applied very widely, as Wikipedia does, calling it any "collective
effort of individuals who network and pool their resources, usually via the
Internet, to support efforts initiated by other people or
organizations."
Crowdfunding, if thought of merely as the pooling of resources for a
common cause, is as old as human groupings. Neighbors pitching in to help
someone who's had a house fire, supporting the local rescue squad, sending
truckloads of canned goods to disaster areas – all of these cooperative
efforts represent crowdfunding of a sort.
But that isn't the way it's thought of nowadays. In
fact, the very term "crowdfunding" is
just six years old, with Word
Spy attributing its first official appearance in print to blogger Michael
Sullivan on his fundavlog of August 12, 2006. And the first book on the subject – Kevin
Lawton and Dan Marom's The Crowdfunding
Revolution – wasn't published until October, 2010.
In contemporary usage, "crowdfunding"
is generally defined as an ongoing money-raising effort organized through the
Internet. As such, it is intimately related to and initiated by online
communities and social networks. However, while a given crowd might pre-exist
as a community, it can also arise completely spontaneously, from disparate
groups around the world which happen to share an interest in funding a
person, project, or whatever. And it can be brought together by a website
whose purpose is just that. These are the characteristics that distinguish crowdfunding from traditional co-ops.
Funding the Arts
Early crowdfunding efforts
often involved musical groups that needed cash to advance their careers. A
British rock group, Marillion, wanted to tour the
US in 1997, but the band lamented on a newsgroup that they couldn't hack it financially
themselves, and their record company wasn't prepared to pony up the support
money.
Marillion's fans then took it upon themselves to raise the
necessary bucks. Word went out via the Net, and the money poured in. With
just a live CD promised in return, the band raised $60,000 from all over the
world. Later, Marillion went on to tap its Internet
fan base to fund the production and distribution of subsequent albums,
cutting out the record company entirely.
ArtistShare, founded in 2000, formalized the concept,
becoming the first fully crowdfunded website for
music. In 2005, American composer Maria Schneider's Concert in the Garden
became the first album in history to win a Grammy Award without being
available in retail stores. The album, funded through ArtistShare,
received four nominations that year and copped the Grammy for "best
large jazz ensemble album." Since then, ArtistShare
projects have received several other nominations and taken home four
additional Grammies.
Other music-centric crowdfunding
sites followed ArtistShare's lead, including SellaBand
(2006) and PledgeMusic (2009).
Music and the arts have always been logical targets for
crowdfunding and, with barriers to entry in the
movie business historically so high, film was a natural. Movie crowdfunding was initiated by French entrepreneurs and
producers Benjamin Pommeraud and Guillaume Colboc in August 2004, when they launched a public
Internet donation campaign to fund their film, Demain
la Veille (Waiting for Yesterday). Within three
weeks, they managed to raise $50,000, allowing them to make the picture.
Spanner
Films has been a centrally organized pioneer in this area, and has even
published a guide titled How
to Crowdfund Your Film, just in case you
have any great cinematic ideas. Spanner crowdfunded
a film called The Age of Stupid, set in 2055 and starring Oscar
nominee Pete Postlethwaite. Further taking
advantage of the Internet, the company in September 2009 pulled off a gala
global premiere, satellite-linking to more than 700 cinemas and other venues
in 63 countries, with a total audience of more than a million people.
Many, many other sites – including RocketHub,
Sponsume,
My Show Must Go On,
AKA Starter, inkubato,
and A Swarm of
Angels – have set up shop to service the creative arts.
One of them, Indiegogo, originally focused
on fundraising for independent film, and was launched at Sundance in 2008.
But the site soon branched out into all sorts of creative projects, whose
breadth is confirmed by a quick look at the projects currently listed: game
development; a graphic novel; a documentary film; a gender-transition
calendar; a Canadian comic-book anthology; an asthma education app; traveling
dramatic performances; and some kind of knitting endeavor (which you can back
if you read German), among others.
As an example of how these things work, here's Indiegogo's model: Entrepreneurs create a page for their
funding campaign, set up an account with PayPal, make a list of
"perks" for different levels of donation, set a fundraising goal in
dollars (or euros, pounds, etc.), then create a social-media-based publicity
effort. They publicize the projects themselves, through Facebook, Twitter,
and the like. Postings are free, and users have 100% ownership of their
campaigns.
In the end, Indiegogo
collects 4% if you reach your goal, but allows you to keep money raised even
if you don't, minus 9% (to encourage people to set "reasonable"
goals). If you fail to reach your goal, you may also elect to return all
money to contributors, and you will owe nothing.
Kick It into Gear
Then there is the current king of the hill, Kickstarter.
Launched in April of 2009, the site has been a massive success. At the
moment, Kickstarter says that over $350 million has
been pledged by more than 2.5 million people, successfully funding more than
31,000 creative projects "in the worlds of Art, Comics, Dance, Design,
Fashion, Film, Food, Games, Music, Photography, Publishing, Technology, and
Theater."
The bulk of Kickstarter-funded
projects – 68% – were in the $1,000-10,000 range. But 300 raised between $100,000 and $1 million, and 13 raised in
excess of $1 million. Of those that are posted, about 45% fully meet their
goals, and about 12% end without having received any pledges. 82% of those
that reach 20% of their goal go on to attain full funding.
Kickstarter is an "all or nothing" proposition. Project
creators make their pitch, set a funding goal, and a
deadline by which the full amount must be raised. If they succeed, donors'
credit cards are charged at that time; if they don't make it, no one is
charged anything. Kickstarter takes a 5% cut of
successful fundraisers, and payment processing fees can claim another 3-5%.
Outside of that, creators keep 100% of the money and retain all rights to
their projects.
Backers receive no equity or financial payback, but are
promised "rewards," depending on one's pledge level. Mostly, people
participate in good faith, contributing to something they believe in. Kickstarter's "Terms of Use require creators to
fulfill all rewards of their project or refund any backer whose reward they
do not or cannot fulfill." But there are no legal guarantees.
If a Kickstarter project
really tickles people's fancies, the results can be stunning. For instance, a
modest project currently listed on its start page began with a goal of $5,000
and, with the deadline still two weeks away, has pulled in almost $110,000.
Where To from Here?
So, is crowdfunding the
future capital source for every new venture under the sun? Well, probably
not... although we can't say for sure, because it does sometimes seem that
way. In no particular order, some current and projected applications include:
- Journalism – With Spot.us and Global for me, the public provides suggestions and
tips for stories. When a journalist accepts a suggestion, he creates a
pitch, which is then funded by those who are interested. Whether this
will gain any traction with readers accustomed to free Internet news
content remains to be seen.
- Politics – Democratic candidates can benefit
from ActBlue, a crowdsourced
fundraising site that allows anyone to be part of a PAC. Since 2004, ActBlue has raised over $300 million. Across the
aisle, Ron Paul ran his campaign for the presidential nomination largely
through crowdfunding.
- Public projects – Want those bike lanes but
your town is out of money? You can turn to CivicSponsor.
- Fashion – Milk and Honey
Shoes allows customers to design their own shoes. Several other
sites that will let consumers participate in designing new fashions are
currently under development.
- Personal wants and needs – GoFundMe
specializes in fundraising for individuals, for everything from weddings
to funerals, and medical expenses to high-school trips. Greedy or Needy
aims to fund make-a-wishes without the necessity of going through a big
foundation. Kapipal teams up with PayPal to finance just
about anything.
- Science – Still in its infancy, science crowdfunding has many researchers excited about the
possibilities. RocketHub's #SciFund Challenge was the first crowdfunding initiative to support science projects,
while Petridish invites donors to "fund science
& explore the world with renowned researchers."
- Biotech – On October 1, biopharmaceutical
antibacterial drug-discovery company Antabio,
and WiSEED,
the French crowdfunding platform dedicated to
technologic startups, announce the successful completion of their seed
round of financing. Initially funded by more than 200 small investors, Antabio was able to finance a key step in the
validation of its drug-candidate molecules, bringing it to the attention
of some major players in the drug-discovery arena.
- Cars – According to Gizmag,
Local Motors
"is a small Phoenix, Arizona-based automotive firm that uses crowd
sourcing for brainstorming, designing, refining and developing vehicle
ideas. They work with an Internet community of more than 20,000
designers, engineers, auto enthusiasts and other passionate minds toward
developing unique, customer-centric offerings." They're currently
working with BMW to crowdsource the Beamers of
the future.
- DIY – Launcht claims it
"empowers universities, nonprofits, startup crowdfunding
portals and others" to design and implement "their own custom
white label crowdfunding & voting
platforms."
- Brewskies – BeerBankroll
is your destination if you want to help fund a small brewery.
And so on.
It's difficult to overstate how fast and furious crowdfunding has grown (but it pales in comparison to the
growth potential of a new technology in replication). So red-hot is
the sector that a whole secondary support network has popped up out of
nowhere, largely as a result of the 2012 passage of the Jumpstart Our
Business Startups (JOBS) Act, which effectively lifted a previous ban against
public solicitation for private companies raising funds. Among the nascent
bureaucracies there is now a National Crowdfunding
Association (NLCFA), National Crowdfunding
Association of Canada, World Crowdfund Federation, Crowdfund Intermediary Regulatory Advocates, and Crowdfunding Professional Association (CfPA), all of which sprang into existence subsequent to
the passage of JOBS. The CfPA offers a course in Crowdfunding 101 and sponsors a Crowdfunding
Bootcamp to teach entrepreneurs how to master the
process.
While crowdfunding does not
yet have the Web presence of some other services, it's headed up with a
bullet. Alexa, a leading Web information company,
ranks some 30 million websites worldwide, according to the amount of traffic
users of its toolbar generate. Its statistics are considered one of the most
accurate yardsticks by which site popularity can be measured.
As of August 2012, crowdfunders
were nowhere near challenging the top 10 megasites
like Google, Facebook, YouTube, Wikipedia, Twitter, and Amazon. But Kickstarter was in 748th place, followed by Indiegogo (#1,798). Rounding out the ten most-visited crowdfunders were GoFundMe
(10,892), ChipIn (28,394), RocketHub
(47,424), GiveForward (52,383), Fundable (60,149), Crowdtilt (133,246), crowdfunder
(105,447), and appbackr (125,977).
Pros and Cons… and Cons
The pros of crowdfunding
– the Internet's P2P ability to unite worthy projects with seed
capital, in the absence of conventional funding sources, and bring dreams to
life – are obvious. But what of the cons?
Well, there's fraud, for one. Though crowdfunding sites claim to do detailed background
checking before clearing a project to be posted, in reality this is fertile
new ground for scam artists. In fact, in August the Massachusetts Securities
Division charged a Lowell man in a crowdfunding
scam, alleging that he had bilked 20 investors – who thought they were
putting money into a gaming site – out of more than $150,000.
Regulation of securities issuance is another sticky
topic. Questions about crowdfunding campaigns
involving unaccredited investors and private companies are being closely
examined in Washington. Complicating the matter is that due diligence can be
very hard if not impossible for a prospective investor to do prior to offering
startup money for a new company, and that the stock those companies are
offering is often not intended to be traded on any recognized exchange.
Private offerings for oil and gas drilling, which are not SEC-registered, are
another area of concern.
Though the SEC has yet to set any hard-and-fast rules
in place regarding equities, it is widely expected to stick some fingers into
this rapidly baking pie as soon as the next few months.
Further, the North American Securities Administrators
Association (NASAA) publishes an annual list of emerging threats to
investors. This year, NASAA included crowdfunding
on its list of worries, warning that fraudsters could use it in new scams
involving such unexplored territory as precious metals, real estate, and
promissory notes.
Although not overtly fraudulent, there are also going
to be ideas (including possibly some great ones) for which the funding goal
is unrealistic. A September Reuters article discussed a Kickstarter project called Lifx,
which intends to develop a dimmable, WiFi-enabled,
multicolor, energy efficient, 25-year LED light bulb that you control with
your iPhone or Android... and to start shipping finished product by next
March. Talk about ambitious. So far, the bulb is a monster Kickstarter hit, and the project is oversubscribed.
Backers have thought so highly of it that they've ponied up more than $1.3
million, in return for which they'll get… well, some bulbs. Once
they're in production.
Unfortunately, as the Reuters piece pointed out,
"Coming up with a truly worthy LED bulb is enormously complex, requiring
expertise in physics, chemistry, optics, design, and manufacturing." One
of the early entrants into the space, the Switch bulb, has received an
eight-figure investment from one VC company alone; it was promised in October
of 2011 and still hasn't arrived. Phillips, which won a $10-million
government prize by marketing the first LED bulb, spent much more than that
in development. So maybe Lifx can deliver the goods
for $1.3M, and good for them if they can. But
investors should probably be at least a little skeptical that they'll ever be
dimming the room lighting with their phones.
If, instead of bulbs or other manufactured goods that
may not show up, you're looking for a return on capital – i.e.,
investing in a startup that's offering stock – you are also likely to
be disappointed, since more than half of all new small businesses fail within
five years. Should you wish to make such an investment, it would seem
sensible to find one in your immediate area, so you can check it out with
your own boots on the ground.
Then there is intellectual-property theft. Most
basement innovators probably haven't patented their ideas before presenting
them to the waiting world, which means there's nothing to prevent someone
with deeper pockets from stealing the idea, producing the product, and
getting it to market first.
The reverse is also possible. Someone may, knowingly or
unknowingly, post a project that infringes on someone else's patent or
intellectual-property rights. According to a recent story in Wired,
this has happened on Kickstarter at least five
times since April.
On balance, though, we're optimistic. All of these
potential drawbacks will eventually work themselves out in the marketplace,
we're sure, provided that forthcoming government regulations don't make it
too difficult for these sites to thrive.
Investment Implications
Crowdfunders may facilitate transfers of newly minted stock to
investors, but they don't sell stock in themselves, so there are no opportunities
here, at least for the time being.
However, there are some income-producing sites, like
Lending Club, that have been very successful at returning a decent yield.
Some Casey Research employees are invested in them, and they may interest
readers who are willing to do their homework. By all means, check them out
for purposes of portfolio diversification if you'd like to – or crowdfund your own pet project.
As promising as crowdfunding
is for investors, its profit potential pales in comparison to a new
technology that could change everything from people's shopping habits to the
way diseases are treated. When you hear about it, it may well seem like
science fiction, but it's already working on a number of fronts. You can learn more about it here.
|
|
