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Screw the Critics: Five Reasons Crowdfunding Works
editorial

Screw the Critics: Five Reasons Crowdfunding Works

Editor’s Note: In the op-ed below, Crowdsourcing.org Editor Eric Blattberg outlines five reasons crowdfunding works: crowdfunding (1) facilitates viral philanthropy, (2) spurs innovation by lowering the damage caused by failure, (3) reduces uncertainty by aggregating demand, (4) benefits venture capitalists, and (5) democratizes finance for non-accredited investors.

On October 9, a Taliban-affiliated terrorist boarded a school bus in rural Pakistan and gunned down three schoolgirls, including 15 year-old women’s activist Malala Yousufzai. Miraculously, all three girls survived, but Malala sustained grave injuries and remains in critical condition. The incident provoked international outrage, but it also engendered global compassion: a few days after the shooting, a group with personal and public ties to Malala started the Malala Yousufzai Family Fund, a crowdfunding campaign to cover her medical bills and support girls’ education in Pakistan. More than 650 people have jointly donated $49,700 to the campaign, with more pouring in each day.

Despite crowdfunding’s democratic appeal — anyone can try to raise money for any idea — not everyone is on board. Gawker implored the masses to “End Online Panhandling Forever!” calling Kickstarter “begging by and for the privileged” (it’s not). Gizmodo proclaimed “We’re Done With Kickstarter,” arguing that turning an idea into reality should be more difficult than convincing “a mob of drooling, optimistic simpletons” to fund an online campaign (it is). Entrepreneur attempted to explain “Why Crowdfunding is Bad for Business” — apparently, it’s because the crowd lacks the business acumen of high-net-worth investors (irrelevant).

These and other anti-crowdfunding declarations are misguided, failing to consider crowdfunding’s broader implications on the people who engage in it and on the economy at large. In reality, crowdfunding is a boon for philanthropists, artists, investors, and entrepreneurs.

ACCOUNTABILITY VS. INNOVATION

Critics routinely demonize crowdfunders as either fraudsters conning people out of money or, more often, simply inept and unprepared. While some projects face unforeseen delays, and occasionally they fail entirely, this is not abnormal — particularly for tech-related ventures. There are extremely few cases of legitimate fraud; of the 79,500 campaigns posted to Kickstarter, only one actual scam has been documented — and members of the crowd uncovered it before anyone lost their money.

Nonetheless, Kickstarter goes to great lengths to increase crowdfunders’ accountability and keep project backers’ expectations in check. In September, Kickstarter’s cofounders authored a blog post entitled “Kickstarter Is Not a Store.” The company tightened guidelines for hardware and design projects to reduce vaporware, and now requires campaign creators to talk about their project’s “risks and challenges.” These are steps in the right direction.

Although Kickstarter doesn’t want to embrace it, it is a store, of sorts. It sells ideas, and the crowd vets them, funding or rejecting the site’s plethora of projects. But, like a store, crowdfunding campaigns also market a product and generate an audience — which, before crowdfunding, used to be completely separate processes. While Kickstarter helps generate funds, which is what most people focus on, it also reduces uncertainty by frontloading knowledge of a potential customer base, which is of huge value to the business environment. As NYU professor and web guru Clay Shirky says, “this method of aggregating demand isn’t a new way to do the old stuff; it is a new model of the business ecosystem, full stop.”

Crowdfunding doesn’t lower the likelihood of failure, but it lowers the damage caused by failure. Peer past the high-tech veneer of headline-generating projects — Pebble’s $10.2 million smartwatch, Ouya’s $8.6 million game console — and the majority of crowdfunded campaigns are relatively modest affairs: funds to knit some hats or open a pizza kitchen. Crowdfunding gets people to try more ideas, which inherently means more failure, but it also means more surprises and innovation. Imagine these projects securing traditional financing: a desktop jellyfish tank, a .50 caliber bullet bottle opener, or a pair of motorized skates. All three made the jump from crowdfunding campaign to standalone business. Not all of these ventures will succeed, but they could become runaway hits, generating millions in revenue and employing dozens or even hundreds of people. Without crowdfunding, none of them would even exist.

It might appear the rise of crowdfunding spells the death of venture capital, but nothing could be further from the truth. The two work together symbiotically. Crowdfunding simplifies an investor’s job, making it easy to envision viable businesses based on successful trial runs — in other words, crowdfunded projects, which probably wouldn’t have received VC money from the get-go. These projects and their creators also have built-in fan bases, compared to unknown entrepreneurs burning through angel investors’ money.

INVESTORS, EMPOWERED

Crowdfunding can be a boon for funders as well as fund-recipients. Crowdfund investing will be legal in the United States as soon as the SEC implements the Jumpstart Our Business Startups (JOBS) Act — which President Obama signed into law earlier this year — but equity-based crowdfunding platforms already operate in parts of Europe and Australia.

It’s irrational to assume, as Entrepreneur does, that a crowd of investors is only as valuable as the funds they offer. In many cases, a crowd’s expertise is more valuable than that of a few high-capital investors. Take Gambitious, which allows the crowd to invest in video game projects; a crowd of gamers knows more about video games than venture capitalists ever will. (But if a business raises a seed round from the crowd, that doesn’t exclude it from also seeking venture capital.)

Investing on a small scale empowers average citizens, who by definition are not accredited investors (individuals with a net worth in excess of $1 million). By reducing the scale of the investments — $50 here, $100 there — these unsophisticated investors can gain valuable market knowledge without incurring massive risk. In the United States, the JOBS Act will limit investment restrictions based on investors’ annual income and net worth, providing them a market in which to dabble and learn while protecting them from their own potential negligence.

Crowdfunding, then, provides a less risky alternative to traditional financing for both investors and entrepreneurs, which means more new businesses, the engines of a healthy economy. It liberates artists to focus on their passion instead of their day job — unless, of course, their passion becomes their day job. It facilitates viral philanthropy, effectively crowdsourcing compassion.

We all reap the benefits of crowdfunding, even if we don’t participate in it. But we should. Don’t dismiss this democratization of finance because a Kickstarter project some irate blogger backed arrived a few weeks late. Crowdfunding is so much bigger than one troubled campaign; it is a vibrant financial ecosystem that empowers the people, giving the little guy an opportunity to make a difference. And that, I think, is worth supporting.

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  • Guest Rebecca Tversky Dec 06, 2012 03:03 pm GMT

    "Crowdfunding ...provides a less risky alternative to traditional financing for both investors and entrepreneurs, which means more new businesses, the engines of a healthy economy. It liberates artists to focus on their passion instead of their day job — unless, of course, their passion becomes their day job. It facilitates viral philanthropy, effectively crowdsourcing compassion.

    We all reap the benefits of crowdfunding, even if we don’t participate in it. But we should. Don’t dismiss this democratization of finance..."

    I know I'll need this kind of help soon and love to provide it myself. We should be able to invest in what we believe in.

  • Eric Blattberg Eric Blattberg Dec 10, 2012 09:49 pm GMT

    Para mis amigos españoles: http://blog.megafounder.com/elcrowdfundingfunciona/#more-1386

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