August 17, 2014
The concept of crowdfunding is not new. In fact, it dates back to the beginning of the industrial revolution, over 200 years ago, when the earliest industrialists needed to pool capital to take their businesses to the next level. I can just imagine Henry Ford sitting around in the country club, at the bar in the early 1900s with a bunch of his wealthy friends (his crowd), explaining the new concept that he’s come up with — the idea for a factory and an assembly line, to produce automobiles. Several of those guys probably each chipped in a sizable number of dollars; shares were issued to each of the investors, and the investors in that company and their families have been set for well over a century.
The whole stock market is based on the concept of pooling capital, which is a form of crowdfunding. But the form of crowdfunding that we refer to now really relies on the digital world and the use of the Internet to generate both leads and dollars from investors.
The earliest forms of current crowdfunding are five to eight years old, with the advent of “donation-based” or “rewards-based” crowdfunding platforms. Systems like IndieGoGo and Kickstarter turned these platforms into a sizable business that currently generate over $1 billion a year. Under the donation-based or rewards-based model, entrepreneurs such as filmmakers, artists, and others can go to a community of fans who like the product that the promoter is producing and solicit donations.
For example, for $20, a person might put the money in with the expectation only that they would receive a DVD of the finished product, if and when it was ever completed. If they put in a little more the reward would get better so perhaps they would receive a theatrical poster with the DVD. Or if they put in even more, maybe the poster would be signed by the star of the movie. But in every case, it was a donation with no expectation of anything material in return, especially if the project became successful. These projects have worked great, and lots and lots of different businesses have been funded in this way.
It didn’t take long for the business community to catch on. And once the business community got involved, everything started to change. As most of the readers of my column understand, for most inventors and entrepreneurs, the hard part is getting the seed capital to get the project rolling.
What’s difficult is producing the very first product, or sometimes even the prototype. In most jurisdictions in the United States, making sales without having a product that’s available and ready to ship is against the law. So, there’s a real conflict for the entrepreneur. How does one get the capital to produce the product? If they could just produce the product, or if they could just pre-sell the product first, then producing it wouldn’t be so bad. Unfortunately, that leads to all kinds of problems, Ponzi schemes included.
But in a donation-based or rewards-based crowdfunding model, entrepreneurs are able to create products and services by taking in dollars first, and producing the product second. They do that by taking donations for the product, and once the donations are in, they can reward the donors with a copy of the artwork or the product that the money was donated for, thereby skirting the commerce rules that limit so many traditional companies. It’s a complicated formula, but using this crowdfunding model has solved a lot of problems for a lot of entrepreneurs. Unfortunately, there was one project that was so successful that it has really soured the water for everybody who has come since then.
I’ll finish this post with that story in a few days.
Filed under Business Financing, Business Growth, Creating Buyers, Film Financing, Financial News, Growth Minute, Guru Marketing, Private Equity, Raising Capital, Real Estate, Strategic Networking, That's Cool by Joel Block