Crowdfunding, or crowd-based fundraising, is a relatively new phenomenon, a tool that has really taken off in the last five years. According to one definition, crowdfunding is “collective effort by people who network and pool their money together, usually via the Internet, in order to invest in and support efforts initiated by other people or organizations.” But what makes crowdfunding so interesting to me are the obscure projects that people give their own hard-earned money to, or to initiatives started by people that they don’t even know. Ever hear of the guy who raised $55,000 on Kickstarter for the purpose of making potato salad (his original goal was $10)? Or there’s the most successful Kickstarter campaign ever, which raised more than $13 million from 63,642 backers in 52 days this summer for the “Coolest Cooler” (it has a blender, waterproof speaker, and a USB charger).
There are the joke campaigns, like the potato salad, that get a lot of play in the press, and there are new gadgets like the Coolest Cooler that raise $13 million. Almost every industry can be found on crowdfunding: music, finance, fashion, and raising money for non-profits.There are Olympic athletes who use crowdfunding sites to support their expensive dreams, and movies that get their budgets entirely from fans. Crowdfunding is anything but a joke or something to be dismissed as a fad. In 2013, crowdfunding sites raised $5.1 billion. $60,000 was raised every hour in the month of March 2014. Looking at these numbers, it’s easy to see why so many people and organizations are flocking to crowdfunding sites to fund their newest venture.
What makes crowdfunding sites and their initiatives so successful? At its core, crowdfunding is marketing, and it uses social networks like sjd;lkgj talked about in his Ted talk to do so. It’s a way of soliciting money, except that instead of writing to or calling every person that you know, you can direct them to your site. And then it’s easy to share, so you can reach those friends of friends of friends that you don’t personally know. That’s why crowdfunding is so successful—it opens up new potential backers and “casts a wider net.” In this way, customers are the key players in crowdfunding, enabling the success of a business venture at a completely different stage of the process. Crowdfunding ‘customers’ help to create the actuality of a product or service that other customers can then consume. And unlike traditional investing, this does not involve a few players being tapped for large amounts of money; rather, it is a large amount of donors that contribute smaller amounts.
There are two basic types of crowdfunding models: rewards and equity. The rewards model is the original crowdfunding model, the one where people can “prepurchase products, buy experiences, or simply donate.” Equity crowdfunding allows the donors to become shareholders in the companies. Both of these models show what makes crowdfunding so unique: it’s changing the role of the consumer, expanding it to include investment support. Crowdfunding is changing the face of entrepreneurship and small businesses.
What drives this consumer participation in crowdfunding? Why does a person decide to give some of their hard-earned money to someone else’s desire to make potato salad, or so that a cooler can be made or that potential Olympians can keep training and reaching for their dreams? According to one study, there are a few motivators, some that contrast with each other: there’s the concept of ‘patronage,’ that people like to feel like they made the product/service/dream possible; there’s also the idea of ‘social participation’—the desire to be part of a community initiative. And finally, there’s the desire for financial payoff.
There are also three stages in crowdfunding: 1) friend-funding, in which donations pour in rapidly; 2) ‘getting the crowd’ in which news of the initiative spreads through social networks, but the fundraising slows down; and 3) the engagement moment, when a chain reaction is triggered, and the target goal is reached quickly.
Understanding the customer’s motivations as well as the stages of crowdfunding, are important in creating a successful crowdfunding campaign. Based on the exponential growth of crowdfunding in the past five years, I think it has the potential to really change the role of the consumer in marketing, and enable a lot more entrepreneurs and start-ups.