(Originally published as a Guest Blog on CX.com on December 11, 2012)
Crowdfunding. You’ve heard of it — sexy projects by entrepreneurs who buck the establishment by going directly to the public for funding. Or maybe you’ve heard of the other crowdfunding — fraud, deceit and boiler room brokers bilking widows out of their pensions and life savings.
It’s a familiar tune. New technology disrupts an established, elite industry and empowers us to do it better, fast and cheaper. And, in the beginning, the professionals, pundits and predictors of doom tell us how bad the world will be if the industry is democratized.
Anyone over the age of 35 can remember the same dire warnings about eBay and the entire eCommerce industry — typing in your credit card number online was insane. Buying a product from an individual you never met and giving them your address? That was equivalent to inviting a rapist to your house for Thanksgiving.
Recently we’ve heard the same shrill arguments for social networks, online dating, self-publishing and for location-based services such as Foursquare.
Crowdfunding is foreign to the current elite, and it is the latest industry to get disrupted by new technologies and new behaviors – thus, it is the target of much fear, uncertainty and doubt, as well as shrill, derision and regulation. Crowdfunding is for creatives and entrepreneurs tired of being beholden to venture capitalists and futilely jumping through hoops for funding their innovative ideas and projects. The concept has been around for years, even centuries. Crowdfunding is the practice of funding a project, venture or a social cause by raising small amounts of money from a large numbers of individual donors. Modern crowdfunding uses the power of social networks, “The Long Tail” (large special interest groups) and ecommerce to make it a significant new form of funding.
Crowdfunding is based on collective intelligence (aka The Wisdom of the Crowds) –maybe not the wisdom of the crowds, but certainly the “will” of the crowds. It is big, new and disruptive, and it is becoming an established part of the ecosystem. Here are five big things you should know about crowdfunding.
1. Crowdfunding has several different flavors.
Most of the news and noise these days about crowdfunding is about ”equity” crowdfunding — allowing the” crowd” to purchase very small amounts of stock for small amounts of money. Ironically, equity crowdfunding does not yet exist in the United States; new laws have been passed to allow it, but it will take many months or longer to ratify. Today, predominant models of crowdfunding are “donation” crowdfunding, and “rewards-based” crowdfunding. Kickstarter is the granddaddy of rewards-based crowdfunding. Think of it like a PBS fundraising drive, where donors get interesting perks and gifts for different levels of donations.
2. Crowdfunding is not about investments.
Even when legal, the last thing online crowdfunding donors think about is a financial return on investment. For people giving $50, $100 or $500 to help fund a promising project or entrepreneur, it’s all about an emotional connection and return. In fact, recent studies indicate that the prospect of a financial ROI is a negative for most crowdfunders. It’s about “return on emotion” and having a part in helping a project become successful.
Crowdfunding is more like putting money into a political campaign. You don’t expect a direct financial return — you believe in the principles of the campaign and want to be a part of helping them win. And you get some interesting rewards that show you are a donor — same for crowdfunding entrepreneurs, creatives and projects.
3. The rules are different.
For entrepreneurs trying to raise money via crowdfunding, toss those books and seminars on fundraising. Business plans and pitches are irrelevant, or, at least, they’re dramatically different. The crowd sees your pitch online via video, photos and graphics, and they are convinced via your blogs, Tweets and posts. They fund your project not based on the “what” and “who” but instead on the “why” and “how.”
4. Forget fraud. Look for proof.
To date, the incidents of fraud related to crowdfunding, worldwide or in the U.S., have been nearly zero. As with ecommerce, we’re sure to see a few cases, but crowdfunding is like ecommerce with a very transparent social aspect. Unlike boiler room brokers, entrepreneurs seeking crowdfunding are transparent for the world to see. Any flaws or potential fraud or risk is publicly discussed among donors and fundraisers. If someone has a bad reputation, it’s known. And, if someone has a good reputation, it’s known — and it gives that person or company an advantage in fundraising.
5. Crowdfunding is for you.
Every disrupted industry at first ridicules the participants of the new — e.g. bloggers, online daters, merchants and marketers. They’re derided as the outcasts and untouchables until they become the mainstream. Crowdfunding is becoming the new normal for startup fundraising. Crowdfunding is filling the new gap between funding new ideas and getting angel or venture capital. Crowdfunding circumvents the elite who make the decisions of which projects should be developed and funded and goes directly to customers and enthusiasts who know better. Crowdfunding allows regular people to become involved with the next Facebook or Google, without need special permission.
Crowdfunding is for you.