What Is Crowdfunding

crowdfund

Pronunciation: \ˈkrau̇d-fənd\

Function: transitive verb

Date: 2006

1. to collectively provide funds from distributed individuals to develop a project or idea.

—crowd•fun•der \ˈkrau̇d-fən-dər\ noun

Crowdfunding (inspired by crowdsourcing) is the process of assembling funds for a project or cause digitally from a variety of individuals who may not be otherwise connected. Non-profit organizations have utilized this approach for years, but artists, authors, and startups have recently begun exploring new possibilities in the field.

Crowdfunding is related to, but distinct from peer-to-peer lending.  P2P lending works like normal loans: a lender gives capital to a borrower in exchange for structured repayment of a larger amount over time. The only difference in peer-to-peer lending is the lender is an individual, not a bank. By removing financial institutions, the decision to invest lies with an individual, not a corporation. Sometimes this allows different kinds of people to get loans for unusual work. Kiva is a great example of a successful, non-profit peer-to-peer lending service.

Crowdfunding moves beyond the 1:1 ratio of peer-to-peer lending and allows groups to finance individual projects. Instead of one lender and one borrower, many lenders can contribute to the same project. In some cases this model shares certain similarities with a joint stock company. Often, contributors can even be paid a share of profits from the venture. However, not all crowdfunding projects involve profit sharing schemes or remunerate contributors.

The most basic projects simply allow individuals to donate funds to support a one-time objective. CharityWater has become visible in this area. Individuals can sponsor a campaign that funds a particular goal. They then recruit others to donate in order to reach a funding target. When the project is over, the organization uses the money to build a new well.

The next type lies somewhere between charity and capitalism. Several platforms appeared in the last 18 months which allow artists and small businesses to finance semi-commercial projects. Kickstarter emerged last year as a leader in this area by allowing artists, authors, and other creatives to offset the expense of undertaking a new project with user contributions. Popular projects include developing a video game, recording a studio album, or producing a film. Some platforms allow artists and producers to split profits with the crowd that funded them, others don’t, and not all projects take advantage of the option.

Remunerating investors who are often faceless and scattered across the globe can be complicated at the best of times. Recently in the United States the Securities and Exchange Commission shut down operations at several p2p lenders. Complex reporting and filing procedures have slowed growth in the profit-driven segment of the crowdfunding market. However, the semi-commercial market thrived under the same conditions. Many projects offer free albums, DVDs, apparel, and other merchandise to all donors and special offers to the most generous contributors. Contribution tiers reminiscent of PBS telethons are a common feature on such projects.

Finally, full-scale venture capital projects are also underway. Diminishing returns across VC portfolios at large has given rise to a greater interest in crowdfunding as an alternative to seed and early stage investments. Startups often receive seed money from friends, family, and angel investors, and are certainly no strangers to complex multi-series funding goals and deadlines. However the regulations worldwide governing ownership and participation in corporate structures vary widely and require significant counsel from legal and financial experts. While significant growth is expected in this sector, it is the least likely to evolve or expand rapidly into the consumer market the immediate future. Trampoline Systems funds its growth in this way.