Crowdfunding is an internet-based fundraising model, where individuals network and pool their money to support a certain project or venture. A crowdfunding activity is composed of a project creator, crowd or the public who will support the project or venture, and a crowdfunding platform.
The “crowd” act as agents, selecting and promoting the projects in which they believe. They are typically innovation-oriented, having a desire to identify and explore the new model of interacting with ventures and other investors.
The term “crowdfunding” originated in the United States. In recent years, crowdfunding has received widespread attention, in which the activities are most active in North America and Europe. To date, crowdfunding has crossed a variety of sectors including art, film, music, interactive digital media, social welfare, etc.
Crowdfunding can be classified into three categories, depending on the role of the crowd:
- Individuals act as donors or sponsors to support the efforts initiated by the venture or organization, such as political campaigns, disaster relief, free software development, scientific research, and filmmaking.
- P2P lending (also known as peer-to-peer lending or person-to-person lending). An individual lends money to the project in order to obtain higher returns.
- Individuals will become shareholders and contribute to the development and growth or the project or venture, in the hope of realizing future profits.
Crowdfunding in the forms of donation and lending are most common. True entrepreneurs see crowdfunding as a good way of securing investments.
History and Background
The first crowdfunding activity can be dated as early as 1884, when the American Committee for the Statue of Liberty ran out of funds for the Statue’s pedestal. Publisher Joseph Pulitzer urged the public to donate money toward the pedestal in his newspaper New York World. In less than six months, more than 125,000 people had contributed to the cause, totaling $100,000.
Since 2009, the crowdfunding industry has quickly emerged as a major funding source for entrepreneurs. In April of 2012, President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act into law, which aims to lessen the regulation burdens on small businesses.
Benefits of Crowdfunding
- As a model of low-cost financing, crowdfunding improves the private financing market, and helps alleviate the difficulties of the growth of small businesses, and hence encourage entrepreneurship and innovation.
- Crowdfunding helps broaden the channels of investments, while facilitate the communication between project creators and sponsors. Average investors have different background and valuation towards each sector; crowdfunding provides a convenient platform for the two parties to convey their ideas about the key factors and their concerns.
- Crowdfunding helps diversify financing risks, and eventually enhance the flexibility and stability of the financial system.
- If executed properly, crowdfuning creates job opportunities, promotes technical innovation and economic growth.
- For project creators, crowdfunding can be seen as a marketing effort which can boost the reputation of a business by showing there is an audience and market for it.
- Fraud and legal concerns. It is fairly easy to get involved in illegal fundrasing. With such a low barrier, internet-based financing activities need a much better monitoring and supervision system.
- Lack of investor protection measures. As a new model of internet-based financing, average investors will need sufficient knowledge and experience to do their own due diligence in order to understand the merits of each offering, and whether the certain offering suits their risk/return profile. Additionally, selecting the best crowdfunding platform posts another challenge in this regard.
- For project initiators, one of the biggest challenges of crowdfunding is there may be little intellectual property (IP) projection. Take the digital media businesses for example, crowdfunding may lead to IP theft and IP plagiarism in the process of publicly announcing the idea and details of the project.