In November 2012, Emily Brooke launched a crowdfunding campaign to raise money for an idea she’d developed during her final year at university in Brighton. Brooke wanted to manufacture a bike light with a difference: as well as functioning like a normal front light, it would also project a green bike symbol on to the ground five metres ahead, so that drivers know a cyclist is coming up behind them.
For a ‘little girl from university with a good idea’ but no manufacturing experience, it would have been a struggle to raise the initial £25,000 by conventional means, but on the crowdfunding platform Kickstarter, which had just launched in the UK, Brooke hit her target in just five days. In the end, 782 backers pledged a total of £55,000 to the campaign. The Blaze Laserlight launched in February 2014; now it’s being sold in 47 countries worldwide.
Brooke’s story is by no means unique. To date, nearly 90,000 projects have been successfully funded through Kickstarter, with more than US $1.8 billion pledged on the platform since it launched in 2009. And Kickstarter is not the only player in the game; according to a recent Massolution survey of 1,250 active crowdfunding platforms around the world, US$16.2 billion was raised globally last year, up from US$6.1 billion in 2013.
In the past, entrepreneurs relied on individual investors and VCs if they wanted to raise early-stage funding. Now, thanks to the explosive popularity of the crowdfunding model, which is driven by the connective power of the Internet, more and more start-ups are raising funds from large numbers of people, most of whom they will never meet face-to-face. The most successful crowdfunded project to date, an online video game called Star Citizen, claims to have raised more than US$85 million in the past three years and is being funded by nearly one million people.
If you are one of the backers of Star Citizen – or other mega-successful crowdfunded projects – you are effectively buying the product in advance, with the added satisfaction of knowing you’ve helped bring it to market. (Star Citizen’s backers will have to wait till 2016 before they get to play the game.) This is known as the pre-order model. You can also access perks, such as a signed poster or a deluxe edition of the product, depending on how much you pay, but you take no stake in the company.
On the other end of the spectrum is the equity model, whereby broad groups of people buy equity in start-ups through online platforms such as Seedrs. The motivation in this case is profit but, as with all investments, risks are involved and there is no return on investment when a company fails.
Despite regulations on equity crowdfunding in many countries, including the US where only accredited investors are eligible to partake, it’s clear that crowdfunding as a whole is on the rise – the Massolution survey predicts that the global market will more than double in size again in 2015, rising to US$34.4 billion.
But to what extent is it disrupting the established finance industry? According to Nir Vulkan, associate professor of business economics at Saïd Business School, University of Oxford, crowdfunding is – for now, at least – filling a gap rather than competing directly with VCs and financial institutions. “In the last few years VCs have moved up in terms of level of investment and it’s harder to get smaller amounts,” says Vulkan, who is conducting new research into the economics of equity crowdfunding. “The alternative has been ‘angels’ or friends and family, but it’s not easy to get more than a few thousand pounds, unless you have a rich family. A company like Seedrs is good at addressing that particular niche and you see a lot of projects now getting funding of £100,000 to £200,000.
“But it is gaining momentum,” he adds, “and deals are clearly increasing, and so it is beginning to have a disruptive effect.” If you want to fully appreciate the effect crowdfunding is having, says Irish entrepreneur and investor Dylan Collins, you need to assess its impact on a sectorspecific basis.“If you look at the toy market,” says Collins, who is also the CEO of kids’ digital media company SuperAwesome, “it’s very hard if not impossible to raise an investment if you’re a small business. But if you run a good Kickstarter campaign and you have people pre-ordering a toy, thus giving you working capital, that changes everything. So I think in certain areas crowdfunding is having a hugely positive impact.”
The benefits extend well beyond access to capital. When Emily Brooke ran her Kickstarter campaign back in 2012, her primary motivation was to show that demand existed for her bike light.“Kickstarter helped me prove that people would actually pay for my idea,” she says. On top of that she received customer feedback. “The 782 people who backed our campaign told us what they liked and didn’t like and the product changed an awful lot in that process – basically they’re paying to do your market research, which is incredible.” Brooke also counts as a major benefit the publicity that comes from running an eye-catching campaign.
Of course not all campaigns turn out as brilliantly as Brooke’s. Yes, nearly 90,000 projects have been successfully funded on Kickstarter, but the number of unsuccessful projects is considerably higher – currently around 150,000. Still, crowdfunding flops don’t seem to be deterring more and more people from investing money and launching their own campaigns. And it’s not just early-stage funding rounds that are being thrown open to the crowd. “We would potentially look at a company like CrowdCube for our next round of financing,” says Brooke, adding: “That’s where I think the biggest change is coming from: equity crowdfunding. And I think that really will start unsettling early-stage investors.”
Collins points to peer-to-peer lending services such as Funding Circle in the UK and Lending Club in the US, which allow savers to lend money directly to SMEs without involving banks or other traditional financial institutions, as a potentially major source of disruption.“I’m pretty certain this phenomenon will get much bigger as the banks don’t particularly want to be in this sector,” he says.
Collins also predicts that disciplines rendered uneconomical by digital media, such as investigative journalism, will increasingly benefit from crowdfunding. “TV economics doesn’t support expensive investigations any more but it doesn’t mean people are less interested, so I can envisage groups of people buying rights to a story and getting return on their investment if it’s resold around the world. That would be really interesting.
“It’s a fascinating sector to watch,” he adds.“Whatever happens, I think crowdfunding will keep on growing for some time.”
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