When new products come to light in the consumer market, there’s the inevitable curiosity as to how (or who) is funding it. In the heavily connected digital age, it doesn’t take much looking to figure this out. But then some of the more revolutionary or experimental products come by way of websites such as Kickstarter or GoFundMe.
Crowdfunding means that products pitched via these websites are meant to generate developmental funding, with backers receiving the products at much lower prices, or even completely free, depending on the amount backed.
As of 2015, crowdfunding has raised an estimated $34 billion worldwide, according to a Massolution report, with Forbes projecting that it would see growth to $90 billion by this year.
What is crowdfunding?
By definition, crowdfunding is the practice of funding a project or a venture via online donations from a large number of people. While the earliest forms of crowdfunding took the form of donations to a person’s chosen product, crowdfunding, as a whole, gained mainstream attention in 2000 with the launch of DonorsChoose.
The word itself was coined in 2006. The maturation of this model gave rise to sites like IndieGoGo in 2008, and Kickstarter in 2009.
As a whole, these platforms circumvent the traditional avenues of investment and come in two forms: reward-based, and equity-based.
The former allows backers to get the product along with certain rewards – for example, in the case of certain tabletop role-playing games, backers not only receive a copy of the rulebook, but also exclusive dice and acknowledgement.
Equity-based crowdfunding provides backers with a share of the company, but unlike reward-based crowdfunding, this form means that a creator must not only produce the product, but also create equity through the company’s construction.
Risk vs reward
Projects that ask for funding via crowdfunding run the gamut from agriculture to technology, comics to video games. While each crowdfunding platform has its own share of guidelines, there are limits to what is allowable as a project.
For example, Kickstarter bans projects for genetically modified organisms after The Glowing Plant Project, and every project must include a proof of concept prior to being opened to the public.
Creators and supporters of crowdfunding projects also carry considerable risks to themselves. For creators, it is the possibility of their IP being stolen, as is the case of Matthew and Mark McLachlan’s designs for the Fidget Cube vinyl desk toy, having raised $6,465,690 through the course of its funding lifespan.
Supporters, meanwhile, may find themselves backing a fraudulent project, or a project that does get funded but is wholly underwhelming, as seen in the case of comcept’s Mighty No. 9. The game was ambitious, but it underperformed in reviews, leading to dissatisfaction from backers around the world.
The rewards often speak for themselves – some of the most fantastic concepts now available on the market were funded via these platforms. Devices like the Oculus Rift virtual reality headset in 2012 sparked rapid development into the world of VR and AR.
The success of the Veronica Mars movie campaign on Kickstarter has also led to networks looking into reviving shows that previously ended.
Creators benefit by having their companies put on the map, and crowdfunding platforms allow them to engage backers with more freedom and to get more feedback from their consumers than normally possible, the financial benefits being that creators get low-cost capital as well.
Potentially, crowdfunding provides people with multiple avenues of investment. This is owing to the fact that people will eventually be able to invest for equity in start-ups, real estate, and the like for as low as $25. For most, it will be the simple pleasure of being able to back the things that they are wholly interested in.
For others, crowdfunding presents an opportunity to find and invest in the next Google. It’s a unique opportunity to grow their money and diversify portfolios in ways previously unseen.
Miggy Castañeda writes about personal finance for MoneyMax.ph. He has also contributed pieces to Yahoo! Philippines, ABS-CBN News, and Rappler.com. MoneyMax.ph is a financial comparison website aiming to help Filipinos save money through diligent comparisons of financial products.