guide to crowdfunding

7/29/2019 Guide to Crowdfunding

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Guest Post: Is There Wisdom In The Crowd?

Submitted by Doug Hornig ofCasey Research,

Back in the 1960s, a clever but financially disadvantaged fellow placed a small ad in a national

magazine that read something like: Money needed. Please send $1 to the address below. Do it

today!No specific need was given, and nothing was promised in return, so that fraud could not

later be charged.

Yet within a few months, thousands of dollars arrived in his mailbox, a considerable sum in

those days. Or so the urban legend goes.

P2P Money

A half-century later, many things have changed, but one thing remains unchanged: People still

need money, and they have not ceased to innovate ways in which to get it.

We have written extensively in this space about many of the P2P Internet connections that are

transforming the planet... in commerce, in education, in the job market, and with business and

social networking. The list of possibilities is truly endless. For yet another example, the world of

money has been given a Red-Bull jolt by a fast-growing phenomenon known as "crowdfunding."

Previously, if you had a grand scheme for a new product or service and you needed seed

money to get your project off the ground, you had to save it yourself, borrow from friends

and relatives, or go with begging bowl to your local bank, which was unlikely to see you as

the next Steve Jobs. If it was a big enough idea, you might even attract the attention of a

venture capital (VC) company, but there you had to be prepared to offer many pounds of flesh in

return. And still, those ideas that didn't meet with bank criteria (there's no collateral for a

software startup) yet weren't large enough for the VC crowd often fell into a no man's land,

scraping out some funding from unorganized, so-called "angel" investors, or never getting

funded at all.

More recently, we've seen the rise of for-profit Internet alternatives to traditional lending, such

as Prosper, Zopa, and the market leader, LendingClub. These P2P companies specialize in small

loans LendingClub's limit is $35,000. They don't originate loans they facilitate them, cutting

out the banks and creating a situation that allows individuals with spare cash directly to invest inother people's dreams, while the dreamers can borrow based on the public responses to their

particular (hopefully compelling) stories. For each loan, there is a multitude of lenders, not just

one.

It's a win-win proposition. Borrowers receive below-market rates with less hassle than is

usually encountered at a traditional financial institution. Investors get an excellent rate of

return, and can attenuate risk by building a portfolio spread across multiple loans. And

LendingClub prospers by taking a cut. The site claims a very low default rate of less than 3%

since its inception in 2007, and it has been a monster success. To date, LendingClub has

negotiated nearly a billion dollars in loans, a meteoric ascent from about $175 million just twoyears ago.

Other, more philanthropically oriented organizations either are or function a little more
http://feedproxy.google.com/~r/zerohedge/feed/~3/2eI0Ch4iF1Y/story01.htmhttp://www.lendingclub.com/http://uk.zopa.com/http://www.prosper.com/http://www.caseyresearch.com/articles/there-wisdom-crowd?ppref=ZHB470ED1112Ahttp://feedads.g.doubleclick.net/~a/Ra3kcHPPp-RMeBbVh6Ir_PUMK_8/1/dahttp://feedads.g.doubleclick.net/~a/Ra3kcHPPp-RMeBbVh6Ir_PUMK_8/0/dahttp://feedproxy.google.com/~r/zerohedge/feed/~3/2eI0Ch4iF1Y/story01.htm


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like nonprofits. They solicit donations in order to make very small micro-loans to budding

entrepreneurs, primarily in the developing world. Donors either simply get their money back, or

the principal plus a small amount of interest. Those that work this way include Kiva, Zidisha,

Fundable, PayPal's MicroPlace, GlobalGiving, FirstGiving, CreateaFund, Calvert Foundation's

Community Impact Investing, and the Grameen Foundation, which received tremendous

worldwide publicity when its partner organization Grameen Bank shared the Nobel Peace Prize

with Muhammad Yunus in 2006.

At the other extreme if you're an upscale investor looking outside of the traditional

markets for greater risk/reward potential there are alternatives for you as well, in the

form of secondary markets. Sites such as SharesPost and SecondMarket provide access to

participation in private placements and the purchase of already existing, pre-IPO shares in

privately held companies. These opportunities are generally only open to accredited investors,

i.e., those who can verify that they are high-net-worth individuals and attest that they're

comfortable with assuming a high degree of risk.

Not quite so well-heeled? You can still play the game.MicroVentures was the first Internet

broker/dealer to help startups in the US raise capital in exchange for equity. Companies can

apply for up to $500,000, and individuals can buy in with an investment as low as $1,000.

There's also MediaShares, which offers companies the opportunity to crowdfund IPOs, and

investors the chance to buy as little as a single share of stock. The stock can be sold online, with

or without an underwriter. A new US law (H.R.1070) has been passed by Congress that will allow

for advertising the sale of stock to the general public and selling to non-accredited investors;

this is expected to greatly expand these types of online offerings. Crowdcube,Grow VC, and

Symbid also finance business startups. SeedUps specializes in tech.

Clearly there are a lot of new and imaginative ways of moving money around that vie forour attention. Many of them would be considered crowdfunding (derived from the general term

"crowdsourcing," which has traditionally referred to works like Wikipedia driven by large

numbers of amateur contributors), since the definition of this term still tends to be on the loose

side. It can be applied very widely, as Wikipedia does, calling it any "collective effort of

individuals who network and pool their resources, usually via the Internet, to support efforts

initiated by other people or organizations."

Crowdfunding, if thought of merely as the pooling of resources for a common cause, is as

old as human groupings. Neighbors pitching in to help someone who's had a house fire,

supporting the local rescue squad, sending truckloads of canned goods to disaster areas all of

these cooperative efforts represent crowdfunding of a sort.

But that isn't the way it's thought of nowadays. In fact, the very term "crowdfunding" is just

six years old, with Word Spy attributing its first official appearance in print to blogger Michael

Sullivan on his fundavlog of August 12, 2006. And the first book on the subject Kevin Lawton

and Dan Marom's The Crowdfunding Revolution wasn't published until October, 2010.

In contemporary usage, "crowdfunding" is generally defined as an ongoing money-raising

effort organized through the Internet. As such, it is intimately related to and initiated by

online communities and social networks. However, while a given crowd might pre-exist as a

community, it can also arise completely spontaneously, from disparate groups around the world

which happen to share an interest in funding a person, project, or whatever. And it can be

brought together by a website whose purpose is just that. These are the characteristics that
http://wordspy.com/http://www.seedups.com/http://www.symbid.com/http://www.growvc.com/main/http://www.crowdcube.com/http://www.mediashares.com/http://www.microventures.com/https://www.secondmarket.com/https://welcome.sharespost.com/http://www.grameenfoundation.org/http://www.calvertfoundation.org/invest/community-investinghttp://www.createafund.com/index.php?route=homehttp://www.firstgiving.com/http://www.globalgiving.org/https://www.microplace.com/http://www.fundable.org/http://www.zidisha.org/index.phphttp://www.kiva.org/


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distinguish crowdfunding from traditional co-ops.

Funding the Arts

Early crowdfunding efforts often involved musical groups that needed cash to advance their

careers. A British rock group, Marillion, wanted to tour the US in 1997, but the band lamented

on a newsgroup that they couldn't hack it financially themselves, and their record company

wasn't prepared to pony up the support money.

Marillion's fans then took it upon themselves to raise the necessary bucks. Word went out via the

Net, and the money poured in. With just a live CD promised in return, the band raised $60,000

from all over the world. Later, Marillion went on to tap its Internet fan base to fund the

production and distribution of subsequent albums, cutting out the record company

entirely.

ArtistShare, founded in 2000, formalized the concept, becoming the first fully crowdfunded

website for music. In 2005, American composer Maria Schneider's Concert in the Gardenbecame

the first album in history to win a Grammy Award without being available in retail stores. The

album, funded through ArtistShare, received four nominations that year and copped the Grammy

for "best large jazz ensemble album." Since then, ArtistShare projects have received several

other nominations and taken home four additional Grammies.

Other music-centric crowdfunding sites followed ArtistShare's lead, including SellaBand (2006)

and PledgeMusic (2009).

Music and the arts have always been logical targets for crowdfunding and, with barriers to

entry in the movie business historically so high, film was a natural. Movie crowdfunding was

initiated by French entrepreneurs and producers Benjamin Pommeraud and Guillaume Colboc in

August 2004, when they launched a public Internet donation campaign to fund their film,

Demain la Veille (Waiting for Yesterday). Within three weeks, they managed to raise $50,000,

allowing them to make the picture.

Spanner Films has been a centrally organized pioneer in this area, and has even published a

guide titled How to Crowdfund Your Film, just in case you have any great cinematic ideas.

Spanner crowdfunded a film called The Age of Stupid, set in 2055 and starring Oscar nominee

Pete Postlethwaite. Further taking advantage of the Internet, the company in September 2009

pulled off a gala global premiere, satellite-linking to more than 700 cinemas and other venues

in 63 countries, with a total audience of more than a million people.

Many, many other sites including RocketHub, Sponsume, My Show Must Go On, AKA Starter,

inkubato, and A Swarm of Angels have set up shop to service the creative arts.

One of them, Indiegogo, originally focused on fundraising for independent film, and was

launched at Sundance in 2008. But the site soon branched out into all sorts of creative projects,

whose breadth is confirmed by a quick look at the projects currently listed: game development;

a graphic novel; a documentary film; a gender-transition calendar; a Canadian comic-book

anthology; an asthma education app; traveling dramatic performances; and some kind ofknitting endeavor (which you can back if you read German), among others.

As an example of how these things work, here's Indiegogo's model: Entrepreneurs create a

page for their funding campaign, set up an account with PayPal, make a list of "perks" for
http://www.indiegogo.com/http://www.aswarmofangels.com/http://www.inkubato.com/en/http://www.akastarter.com/http://www.myshowmustgoon.com/http://www.sponsume.com/http://www.rockethub.com/http://www.spannerfilms.net/how_to_crowd_fund_your_filmhttp://www.spannerfilms.net/http://www.pledgemusic.com/https://www.sellaband.com/http://artistshare.com/v4/


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different levels of donation, set a fundraising goal in dollars (or euros, pounds, etc.), then

create a social-media-based publicity effort. They publicize the projects themselves, through

Facebook, Twitter, and the like. Postings are free, and users have 100% ownership of their

campaigns.

In the end, Indiegogo collects 4% if you reach your goal, but allows you to keep money raised

even if you don't, minus 9% (to encourage people to set "reasonable" goals). If you fail to reach

your goal, you may also elect to return all money to contributors, and you will owe nothing.

Kick It into Gear

Then there is the current king of the hill, Kickstarter. Launched in April of 2009, the site has

been a massive success. At the moment, Kickstarter says that over $350 million has been

pledged by more than 2.5 million people, successfully funding more than 31,000 creative

projects "in the worlds of Art, Comics, Dance, Design, Fashion, Film, Food, Games, Music,

Photography, Publishing, Technology, and Theater."

The bulk of Kickstarter-funded projects 68% were in the $1,000-10,000 range. But 300

raised between $100,000 and $1 million, and 13 raised in excess of $1 million. Of those that

are posted, about 45% fully meet their goals, and about 12% end without having received any

pledges. 82% of those that reach 20% of their goal go on to attain full funding.

Kickstarter is an "all or nothing" proposition. Project creators make their pitch, set a funding

goal, and a deadline by which the full amount must be raised. If they succeed, donors' credit

cards are charged at that time; if they don't make it, no one is charged anything. Kickstarter

takes a 5% cut of successful fundraisers, and payment processing fees can claim another 3-5%.

Outside of that, creators keep 100% of the money and retain all rights to their projects.

Backers receive no equity or financial payback, but are promised "rewards," depending on

one's pledge level. Mostly, people participate in good faith, contributing to something they

believe in. Kickstarter's "Terms of Use require creators to fulfill all rewards of their project or

refund any backer whose reward they do not or cannot fulfill." But there are no legal guarantees.

If a Kickstarter project really tickles people's fancies, the results can be stunning. For

instance, a modest project currently listed on its start page began with a goal of $5,000 and,

with the deadline still two weeks away, has pulled in almost $110,000.

Where To from Here?

So, is crowdfunding the future capital source for every new venture under the sun? Well,

probably not... although we can't say for sure, because it does sometimes seem that way. In no

particular order, some current and projected applications include:

Journalism With Spot.us and Global for me, the public provides suggestions and tips for

stories. When a journalist accepts a suggestion, he creates a pitch, which is then funded

by those who are interested. Whether this will gain any traction with readers accustomed

to free Internet news content remains to be seen.Politics Democratic candidates can benefit from ActBlue, a crowdsourced fundraising

site that allows anyone to be part of a PAC. Since 2004, ActBlue has raised over $300

million. Across the aisle, Ron Paul ran his campaign for the presidential nomination

lar el throu h crowdfundin .
https://secure.actblue.com/http://www.globalfm.com/http://spot.us/http://www.kickstarter.com/


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Public projects Want those bike lanes but your town is out of money? You can turn to

CivicSponsor.

Fashion Milk and Honey Shoes allows customers to design their own shoes. Several

other sites that will let consumers participate in designing new fashions are currently

under development.

Personal wants and needs GoFundMe specializes in fundraising for individuals, for

everything from weddings to funerals, and medical expenses to high-school trips. Greedyor Needy aims to fund make-a-wishes without the necessity of going through a big

foundation. Kapipal teams up with PayPal to finance just about anything.

Science Still in its infancy, science crowdfunding has many researchers excited about

the possibilities. RocketHub's #SciFund Challenge was the first crowdfunding initiative to

support science projects, while Petridish invites donors to "fund science & explore the

world with renowned researchers."

Biotech On October 1, biopharmaceutical antibacterial drug-discovery company

Antabio, and WiSEED, the French crowdfunding platform dedicated to technologic

startups, announce the successful completion of their seed round of financing. Initially

funded by more than 200 small investors, Antabio was able to finance a key step in the

validation of its drug-candidate molecules, bringing it to the attention of some major

players in the drug-discovery arena.

Cars According to Gizmag, Local Motors "is a small Phoenix, Arizona-based automotive

firm that uses crowd sourcing for brainstorming, designing, refining and developing

vehicle ideas. They work with an Internet community of more than 20,000 designers,

engineers, auto enthusiasts and other passionate minds toward developing unique,

customer-centric offerings." They're currently working with BMW to crowdsource the

Beamers of the future.

DIY Launcht claims it "empowers universities, nonprofits, startup crowdfunding portals

and others" to design and implement "their own custom white label crowdfunding &

voting platforms."

Brewskies BeerBankroll is your destination if you want to help fund a small brewery.

And so on.

It's difficult to overstate how fast and furious crowdfunding has grown (but it pales in

comparison to the growth potential ofa new technology in replication). So red-hot is the

sector that a whole secondary support network has popped up out of nowhere, largely as a

result of the 2012 passage of the Jumpstart Our Business Startups (JOBS) Act, which effectively

lifted a previous ban against public solicitation for private companies raising funds. Among the

nascent bureaucracies there is now a National Crowdfunding Association (NLCFA), National

Crowdfunding Association of Canada, World Crowdfund Federation, Crowdfund Intermediary

Regulatory Advocates, and Crowdfunding Professional Association (CfPA), all of which sprang

into existence subsequent to the passage of JOBS. The CfPA offers a course in Crowdfunding

101 and sponsors a Crowdfunding Bootcamp to teach entrepreneurs how to master the process.

While crowdfunding does not yet have the Web presence of some other services, it's

headed up with a bullet. Alexa, a leading Web information company, ranks some 30 millionwebsites worldwide, according to the amount of traffic users of its toolbar generate. Its statistics

are considered one of the most accurate yardsticks by which site popularity can be measured.

As of August 2012, crowdfunders were nowhere near challenging the top 10 megasites like
http://www.caseyresearch.com/cm/greatest-technology-investments?ppref=CSR470ED1112Ahttp://www.beerbankroll.com/http://www.launcht.com/http://www.localmotors.com/http://www.wiseed.fr/http://www.petridish.org/http://search.twitter.com/search?q=%23SciFundhttp://www.rockethub.com/projects/scifundhttp://www.kapipal.com/http://www.greedyorneedy.com/http://gofundme.com/http://www.milkandhoneyshoes.com/http://www.civicsponsor.org/


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Google, Facebook, YouTube, Wikipedia, Twitter, and Amazon. But Kickstarter was in 748th

place, followed by Indiegogo (#1,798). Rounding out the ten most-visited crowdfunders were

GoFundMe (10,892), ChipIn (28,394), RocketHub (47,424), GiveForward (52,383), Fundable

(60,149), Crowdtilt (133,246), crowdfunder (105,447), and appbackr (125,977).

Pros and Cons and Cons

The pros of crowdfunding the Internet's P2P ability to unite worthy projects with seed

capital, in the absence of conventional funding sources, and bring dreams to life are

obvious. But what of the cons?

Well, there's fraud, for one. Though crowdfunding sites claim to do detailed background

checking before clearing a project to be posted, in reality this is fertile new ground for scam

artists. In fact, in August the Massachusetts Securities Division charged a Lowell man in a

crowdfunding scam, alleging that he had bilked 20 investors who thought they were putting

money into a gaming site out of more than $150,000.

Regulation of securities issuance is another sticky topic. Questions about crowdfunding

campaigns involving unaccredited investors and private companies are being closely examined

in Washington. Complicating the matter is that due diligence can be very hard if not impossible

for a prospective investor to do prior to offering startup money for a new company, and that the

stock those companies are offering is often not intended to be traded on any recognized

exchange. Private offerings for oil and gas drilling, which are not SEC-registered, are another

area of concern.

Though the SEC has yet to set any hard-and-fast rules in place regarding equities, it is widely

expected to stick some fingers into this rapidly baking pie as soon as the next few months.

Further, the North American Securities Administrators Association (NASAA) publishes an annual

list of emerging threats to investors. This year, NASAA included crowdfunding on its list of

worries, warning that fraudsters could use it in new scams involving such unexplored territory as

precious metals, real estate, and promissory notes.

Although not overtly fraudulent, there are also going to be ideas (including possibly some

great ones) for which the funding goal is unrealistic. A September Reutersarticle discussed a

Kickstarter project called Lifx, which intends to develop a dimmable, WiFi-enabled, multicolor,

energy efficient, 25-year LED light bulb that you control with your iPhone or Android... and tostart shipping finished product by next March. Talk about ambitious. So far, the bulb is a

monster Kickstarter hit, and the project is oversubscribed. Backers have thought so highly of it

that they've ponied up more than $1.3 million, in return for which they'll get well, some bulbs.

Once they're in production.

Unfortunately, as the Reuterspiece pointed out, "Coming up with a truly worthy LED bulb is

enormously complex, requiring expertise in physics, chemistry, optics, design, and

manufacturing." One of the early entrants into the space, the Switch bulb, has received an eight-

figure investment from one VC company alone; it was promised in October of 2011 and still

hasn't arrived. Phillips, which won a $10-million government prize by marketing the first LED

bulb, spent much more than that in development. So maybe Lifx can deliver the goods for

$1.3M, and good for them if they can. But investors should probably be at least a little skeptical

that they'll ever be dimming the room lighting with their phones.


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If, instead of bulbs or other manufactured goods that may not show up, you're looking for a

return on capital i.e., investing in a startup that's offering stock you are also likely to be

disappointed, since more than half of all new small businesses fail within five years. Should you

wish to make such an investment, it would seem sensible to find one in your immediate area, so

you can check it out with your own boots on the ground.

Then there is intellectual-property theft. Most basement innovators probably haven't

patented their ideas before presenting them to the waiting world, which means there's nothing

to prevent someone with deeper pockets from stealing the idea, producing the product, and

getting it to market first.

The reverse is also possible. Someone may, knowingly or unknowingly, post a project that

infringes on someone else's patent or intellectual-property rights. According to a recent story

in Wired, this has happened on Kickstarter at least five times since April.

On balance, though, we're optimistic. All of these potential drawbacks will eventually work

themselves out in the marketplace, we're sure, provided that forthcoming government

regulations don't make it too difficult for these sites to thrive.

Investment Implications

Crowdfunders may facilitate transfers of newly minted stock to investors, but they don't sell

stock in themselves, so there are no opportunities here, at least for the time being.

However, there are some income-producing sites, like Lending Club, that have been very

successful at returning a decent yield. Some Casey Research employees are invested in them,

and they may interest readers who are willing to do their homework. By all means, check them

out for purposes of portfolio diversification if you'd like to or crowdfund your own pet project.

zero hedge - posted on Today at 02:26by Tyler Durden
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