I think we’ve all been in the situation where we’ve chipped in $10 with a bunch of people for someone’s birthday to get them their long awaited new camera lens, surfboard or professional karaoke set. Well, then we all have participated in crowdfunding. The differences are that it has got a name, the group has gotten bigger, the mediums are more efficient, the whole world is now connected, and now projects, businesses and others are being crowdfunded not only by their friends, but from strangers as well. But even this is not new.
In fact, in 1885 the Statue of Liberty was partly crowdfunded by 120,000 contributors when the project seemed to run out of funds. Also, the ‘Dutch East India Company’ (V.O.C.) was the first to crowdfund the finance of their operations. These shares were the first ever issued stocks in the world. Therefore, the stock market is one big pool of crowdfunding between companies and investors. The difference is that the stock market has rules and regulations whereas the companies/projects on crowdfunding platforms do not have those requirements. Also, the stock market is filled with established companies that have a specific track record.
What this new crowdfunding is trying to do, is fill in the gap of the new ideas, companies, projects that certain people would like to see, buy and make possible, but that traditional funding mediums will not take on. In return for this funding, project owners offer different rewards. You can donate. You can get rewards as in products when production is finished, digital versions or your name on their site, cd or acknowledgements. You can lend the money for a predetermined amount of interest. Or you can get different kinds of equity (shares, revenue sharing, certificates).
Last year, $1.5 billion was crowdfunded throughout the world. This year the first crowdfunded projects have gone through the $1 million mark. Not long after even the $10 million mark was reached. Also, a bill was passed through the US congress to allow equity crowdfunding, under the name JOBS (Jumpstart Our Business Startups) Act. The regulations of this bill are now under construction within the SEC (Securities and Exchange Commission), which are planned to be ready early 2013.
These regulations will be of utmost importance to how the equity crowdfunding landscape will be shaped and therefore what the effects will be on the funding of all these start-ups. It might well revolutionize the financing industry, but as with many situations in economics, it all ‘depends’ on certain other factors. In the meantime, there are a lot of crowdfunding platforms being set-up behind closed doors. It’s a silence before the storm. It’s like the Olympic teams training. And they are training hard, years in advance. They are all going for gold. If the conditions are right this market could explode.
And there are different fields of expertize where gold can be won. As mentioned before there are different types of rewards. But there are also multiple areas of interests, regions, and amounts-needed. And at the end of the race there will probably only be a few key players still standing. These will be the ones with multiple gold medals, the ones that will fill the headlines. And when the dust has settled there will have been some giants defeated by Davids, some security issues, some twitter-scandals, and crowds in protest due to too many projects with no funding.
In the meantime, all we can do is hope that the SEC can provide a decent enough Olympic City for the games to be played and all the anticipation, training, and hard work won’t be for nothing.
Patrick Hurd has studied Development Economics at The Erasmus University in the Netherlands and is a regular contributor for Dia.