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Crowdfunding – A Viable Alternative?

Graphic of cash on a tableCrowdfunding is a tool that provides an alternative to more traditional forms of financing available from banks and other institutions. It has evolved to answer the needs of investors and entrepreneurs who have a desire to participate in a variety of investment opportunities but are severely limited by the amount of cash or credit they have available.

The crowdfunding model is based on the premise of bringing together a large number of individual contributors who individually do not have the resources to invest in an attractive project but together, with other contributors, are able to accumulate a sufficient critical mass. At that point, they join in a unique partnership with the project’s creators--often getting a front row seat of the project’s journey and getting exclusive updates as the project evolves--that they otherwise would not have been able to experience. In some cases there might even be a financial yield that contributors gain from a project much as they would in a more traditional investment situation. However, most crowdfunding projects are about having privileged access to a project’s development and receiving immediate incentives from the campaign along the way or at the completion of the project.

Crowdfunding has been a successful form of funding projects in real estate, start-up companies, philanthropic endeavors, civic projects, journalism, music and independent film projects. In many of the artistic projects, contributors give money to the project in order to receive immediate incentives (i.e. a signed copy of the album or some collectible that is only available through the crowdfunding campaign) instead of a future financial return. In this way, many crowdfunding campaigns differ from more traditional investments. They are not “investors” in the traditional sense: they are not trying to grow their wealth by investing and gaining a financial yield from a successful project.

The process of raising funds using the crowdfunding approach involves online platforms such as KickstarterCrowdfunder, or Indiegogo. The purpose of the platform is to provide the fundraiser with a place to setup a campaign where contributions can be received.

On April 17, 2014, The Guardian published a list of "20 of the Most Significant Projects" launched on the Kickstarter platform up to that time. The following is a sampling taken from a Kickstarter list, which demonstrates the potential magnitude of successful crowdfunded projects.

  • The "Coolest Cooler" raised a total of $13,285,226 from 62,642 backers. The cooler features a blender, waterproof Bluetooth speakers and an LED light.

  • Filmmaker Spike Lee raised US$1.4 million from 6,421 backers in August 2013 to produce Da Sweet Blood of Jesus.

  • Writer Rob Thomas raised $5.7 million from 91,585 backers in April 2013 to create a feature film version of the defunct television series Veronica Mars. 

  • Musician Amanda Palmer raised US$1.2 million from 24,883 backers in June 2012 to make a new album and art book.

  • The highest reported funding by a crowdfunded project to date is Star Citizen, an online space trading and combat video game being developed by Chris Roberts and Cloud Imperium Games, which—as of 7 April 2016—claimed to have raised over USD $111,600,000, beating the previous record of $10,266,844. 

In a recent March 2016 article at Entrepreneur.com, Catherine Clifford noted how, after an analysis of 170,000 Kickstarter campaigns, there were three distinctive fundamentals that led to crowdfunding success:

  • A potential backer of a crowdfunding campaign is making the decision to invest without any “in person” time with an entrepreneur. Therefore, the more visually engaging a crowdfunding page is the greater the likelihood that the campaign will achieve its goal.  

  • Backing a crowdfunding campaign is not without its share of risk. This risk can be mitigated somewhat if the entrepreneur behind the campaign has a resume of successful projects.

  • Reading the comments of campaign backers is a good source of worthwhile information.

Although the massive popularity of crowdfunding has saturated the field with campaigns--and this makes it harder to be effective--if you are diligent with the principles above, the effort could prove to be worth the hard work. 

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