You’ve heard of crowdsourcing – using the minds of many to work for you in coming up with new ideas and implementations. Now there’s crowdsourcing – accessing the wallets of many people to raise money for almost any (and every) purpose. Social media and web 2.0 were made for this, and many entrepreneurs are trying to ensure they develop the right business model as a platform. There was an interesting piece in the most recent Economist Technology Quarterly on this topic. It’s more of a primer than an insight, but it’s a good read with some nice examples. Read it here or an extract below.

Putting your money where your mouse is

Crowdfunding: Artists, musicians and writers are using the internet to aggregate lots of small donations to fund their work
The Economist, Sep 2nd 2010

WIKIPEDIA, a giant online encyclopedia compiled by volunteers, is the product of the aggregation of lots of people’s spare time. An example of “crowdsourcing”, it demonstrates that on the internet, as in the real world, many hands make light work. Can the same approach be applied to money as well as time? That is the idea behind “crowdfunding”, in which lots of small contributions are aggregated online to support artistic or creative ventures.

As crowdfunding has matured from a series of one-off efforts into something reproducible, the money has followed. Millions of dollars, in increments as small as $5, have poured into efforts that connect artists, musicians, writers and others with people willing to fund their projects. Venture capitalists have also shown an interest by investing in start-ups that facilitate crowdfunding.

There have of course been “tip jars” on web pages for years, and even big sites like Wikipedia ask for donations. But this approach works for a vanishingly small number of sites, and then only in conjunction with other sources of revenue. Crowdfunding is different, say its advocates. “It’s not a tip jar, and that’s what makes it sustainable,” says Perry Chen, the boss of Kickstarter, the largest of several start-ups that act as matchmakers between donors and projects.

Instead, crowdfunding works by raising money for a well-defined project within a specified time limit and with a goal of raising a particular minimum sum (typically around $2,500). If the goal is not met, no funds are collected. Donors usually get some kind of reward or recognition (a mention in a film’s credits, for example), but they do not have any rights in the resulting work. The term crowdfunding has also been applied to raising money for companies or charity, says Kevin Lawton, the author of “CrowdFunding: The Micro-VC Revolution!”. But there are regulatory limits on micro-investing, so the term is most widely used to refer to fund-raising for creative work.

Kickstarter lets donors fund art shows, movies, short films, dance, graphic novels and theatre productions. It helped Diaspora, an open-source social-networking project, raise $200,000 during the recent controversy over Facebook’s privacy policies. IndieGogo supports filmmakers, writers and game designers. Some sites specialise: Sellaband helps bands raise money to fund professional recording of albums, and raises money for journalistic projects.

Yancey Strickler, Kickstarter’s chief community officer, says the firm accepts about half the projects submitted to it. “We turn down projects that are charity, that are just straight business expenses, or ‘my dog has cancer’,” he says. Of those that are accepted, about half meet their funding goals: around 1,600 projects had been funded by July 2010. (Another crowdfunding firm, RocketHub, screens out only projects it deems illegal or in bad taste.) Kickstarter says it has raised over $15m for its users since its launch in 2009. Sellaband says it has raised over $3m and has contributed to the funding of 50 albums since 2006. Crowdfunding firms typically take a 5% commission and charge a 3-4% payment-processing fee.

With a little cash from my friends

Crowdfunding has benefited from the rise of social networking, which allows even non-celebrities to accumulate large numbers of fans or followers online, to whom they can reach out when a project needs funding. Successful projects, says Mr Chen, usually require an “anchor audience” of friends or fans who engage in “micropatronage”, enjoying the association with a successful project and a personal link with an artist or writer.

The makers of a series of documentaries about David Lynch, a filmmaker, are using crowdfunding to raise the seed money to start work on the project’s third film. Jon Nguyen, one of the producers involved, says supporters who donate $50 receive a tote bag or a print of a self-portrait by Mr Lynch. They can then follow the project’s progress online. “We’re going to write about it, blog about it, talk to people on Facebook,” says Mr Nguyen. Crowdfunding will be used to raise only 15-20% of the funding, however; the rest is expected to come from European grants.

Ted Rall, a syndicated editorial cartoonist and opinion columnist, raised $26,000 from over 200 contributors via Kickstarter for a four-week trip to Afghanistan. When he first visited Afghanistan in 2001, he says, there were plenty of media outlets that were willing to fund his trip; indeed, they were having trouble finding people prepared to go. But this time around Mr Rall was unable to secure any funding in advance. The crowdfunding effort, however, brought him to the attention of a publisher, who has contracted him to write a book about his trip. Donors who give $100 will receive a signed copy.

Crowdfunding may turn out to be a fad, says Cory Doctorow, a bestselling novelist and blogger who is experimenting with various forms of micropatronage, including selling a bespoke short story for $10,000 to one of his fans. “There will be some people for whom the fact that they raise money for themselves will be a marketing story,” he says. But crowdfunding’s early success at raising sums large enough to be useful, though not large enough to replace other sources of funding for creative works, fits in with a broader trend of using technology to bring artists and their audiences closer together. As Mr Chen notes, artists can now ask their audiences directly for support, and will often get it. “People are thrilled to be involved in the creative process and see something come to life,” he says.

Technology Quarterly

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