Crowdfunding part 2: The past, the present, and the future

Crowdfunding's story is just starting to pick up; and like every story it has a beginning, a middle, and an end (that end hopefully being a successful IPO).

The Past:

An article by Daniela Castrataro at Social Media Week attributes the beginning of crowdfunding to the actions of a rock band called Marillion.  Marillion, in 1997,  had spent a considerable sum producing it latest cd which wasn't selling as well as they had hoped.  Low on funds  Marillion was would not be able to tour in the United States.  The situation seemed hopeless until Marillion's fan base came together and raised a total of $60,000 to fund the band's tour.

Another article by Gijsbert Koren at Smartermoney attributes the beginnings of Crowdfunding to the creation the Dutch East India Company in 1602.  At this time merchants would send out fleets to do trade with the East.  It was not only expensive to embark of this trade, but also dangerous.   There was always the chance the ship would wreck, the crew could take ill, or the inventory could spoil; there were thousand of accidents that could leave the merchant financially ruined.  Enter the Dutch East India Company (VOC).  The VOC was the first company to offer equity (Merchants would buy a percentage of the company in return for a percentage of its profits).  For example, 1 merchant would own one ship before the VOC, but if he banded together with other merchants for a total of 10 people, he would own 1/10 of ten ships (he would get a similar profit, and if one of the ships met its unfortunate end, the merchants life wouldn't be ruined).

Both of these are valid arguments and I believe they are both correct in their own ways; however, I would like to add my own two cents into the argument.  I believe crowdfunding's beginnings lie further in humanities past.  Notice that in both of these examples, crowdfunding was used as a means to decrease risk and further a goal.  I posit that crowdfunding has its roots in the foundations of human nature.  Society in a sense is a type of crowdfunding.  We group together as a means to decrease our risks our individual risk, as well as increase the chances of the groups survival.   But that's enough sociological pondering for one day.  Now fast forward to the 21st century.

The Present:

After the millennium crowdfunding began to get interesting, several websites hosted musical related fundings like the one Marillion undertook.  These were soon followed by websites like Indiegogo, Kickstarter, and Rockethub.  These players followed a similar strategy, and to visualize it I'm going to return to Elly's situation.

Elly has her idea for a widget everyone will love, but doesn't have the funds to make or distribute it.  Instead of seeking traditional funding she can attempt to crowdfund her idea using one of the previous sites.  On one of these platforms she creates a campaign supporting her widget.  She sets the amount of money she needs to raise for her success ($10,000), writes a description of her project, makes a video promoting it, and most importantly; develops incentives for her supporters (check out the right column here for an example).  If a funder donates $5 they get a thank you letter in the mail, for $50 they get a widget, and if they donate $75 they get the custom built name engraved widget (this is only if the campaign is a success, because there is always the chance it will fail.  For more about this please look into part 5 of my crowdfunding series: The Darkside.)

You will notice that the funder does not own any part of the widget, she only receives a predefined  reward for funding the widget.   At this point in time crowdfunding could not take place in another way.  It wasn't until the JOBS Act  was signed into law on April 5, 2012 that equity and debt crowdfunding was partially legalized.  We are still waiting for the regulations to be developed to begin the use of debt and equity, but when the regulations do pass, companies like the Funder's Club are ready to jump into the action.

The Future:

Hopefully in the near future the SEC will finish their work and crowdfunding in the United States will begin to take bloom.  And after that?  I think the concept of crowdfunding will be applied to more and more areas.  Niche websites will begin to fill in the gaps the the incumbents miss.  It will be chaotic and exciting.

Tune in for part 3 of my crowdfunding series to see an example of crowdfunding, and how you can do it too!