Guest Post by Alexandra
Image from Flickr
There are around 600 crowdfunding websites in the world. These come in a variety of flavors – some are an alternative to venture capitalist funding, while others specifically target charitable endeavors and social projects.
Altogether, online crowdfunding raised $2.7bn worldwide in 2012. This is split roughly equally between loan-based crowdfunding (where the investors get their money back) and donation-led crowdfunding (where the investors receive no financial reimbursement but might get rewards, such as a t-shirt, an early-adopter version of the finished product, or even access to the creative process while the project is being realized).
Kickstarter, Buzzbnk and Crowdit are three crowdfunding websites with different USPs and contrasting business models.
Although Indiegogo preceded it by years and claims the most ever pledged to a crowdfunded project, Kickstarter has risen to prominence as one of the main providers of crowdfund finance to a range of projects in the US and the UK.
It started in 2009, having secured a reported $10m from Union Square Ventures (who also have stakes in Twitter, Foursquare, Tumblr and social gaming company Zynga) and a handful of ‘angel investors’, including Vimeo co-founder Zach Klein and Flickr co-founder Caterina Fake.
Kickstarter was recognized in the mainstream media almost immediately. It featured in Time Magazine a couple of times in 2010 and 2011, and slowly became a household name thanks to a number of high-profile campaigns.
One of the seminal projects listed on Kickstarter was the Diaspora Project, a decentralised social network pitched in the wake of a Facebook privacy fiasco. This received a huge amount of mainstream media attention and was one of Kickstarter’s first high-profile success stories.
More recently, Zach Braff (star of Scrubs) used Kickstarter to fund a film project. While this attracted some criticism from people who believe crowdfunding shouldn’t be used by people who have money/access to money, it attracted new users to the site and that – according to the Kickstarter blog – is advantageous to other projects.
Kickstarter collects a fee of 5% of all pledges from any project which is successfully funded. The money is collected via Amazon Payments in the US (or another third party elsewhere in the world) who take an additional cut of between 3% and 5%. One element to its USP is the fact that it only accepts ‘creative’ projects – this vague term does include marketable products, but Kickstarter expressly forbids charitable campaigns and what it calls “fund-my-life” pleas.
Meanwhile, Buzzbnk is a British crowdfunding website that exists solely to support charities and good causes. Like Kickstarter and Crowdit, Buzzbnk is an online crowdfunding service which enables the general public to make small contributions to great projects. Unlike Kickstarter and Crowdit, these projects always have a clear social or environmental benefit.
Pitches can be for start-up or growth capital. This sets Buzzbnk apart from other crowdfunding websites which tend to focus exclusively on start-up capital. There’s rarely support for ventures which are underway, especially not charitable ones (which Kickstarter, for example, does not allow).
The projects listed on the site have low target figures, especially in relation to blockbuster Kickstarter projects like the Pebble smartwatch. Listings include ‘Boost the People’s Supermarket Oxford’ with a £20,000 target and ‘Social Franchising in China’ with a target of £750 – both relatively modest fundraising objectives.
Co-founded by renowned social activist Michael Norton OBE, the service is a ‘social enterprise’ owned mainly by British charities and foundations. Last year it was given £50,000 by NESTA’s Innovation in Giving Fund, which rewards and funds projects that promote charitable giving, towards optimising its website for mobile browsers.
Crowdit takes the same principles used by conventional crowdfunding platforms and adds more long-term support. It offers creative people (called Dreamers) a space on which to promote their ideas and gather small investments in it from supporters (called Believers). In addition to this, Crowdit brings in business experts, consultants and mentors (called Suits) who can help projects overcome a lack of experience. All of this results in a community of people who want businesses to succeed, rather than relying on the project-fan-base model that is used (perfectly successfully) elsewhere.
Crowdit therefore has a much longer relationship with the projects that use it. People use Crowdit to fund their ideas, but also to share expertise, best practice and knowledge. This peer-to-peer support framework distinguishes Crowdit from the finance-led Kickstarter, Indiegogo et al.
How they got where they are
Business owners can learn a lot from these three similar but inherently different websites.
Social media has undoubtedly fuelled the success of these platforms. Making the content easy to share – even down to the Facebook, Twitter and Google+ links on the pitch pages – is essential if your business model involves users using social tools to promote your product.
Topicality plays a huge part. Kickstarter would not have attained the success it has enjoyed without input from projects which capitalise on current affairs and prevailing trends. Disapora was fundamentally a reaction to the widely-acknowledged issue with social media privacy – the fact it took to Kickstarter was a defining moment in the platform’s history.
Before it launched, Kickstarter was set to be called ‘Kickstartr’. In randomly dropping a vowel from the end of the word (along with Tumblr and Flickr) it would have identified itself as a certain type of tech start-up rather than something that would go on to have a very widespread appeal.
Something that all the crowdfunding platforms have to address is the global nature of 21st century entrepreneurship. The people behind Double Fine Adventure, a Kickstarter project which heralded the platform’s prominence in the video game sphere, had to make special allowances for investors from Europe who wanted to contribute but weren’t offered a way to do so.
Buzzbnk has made use of the grants and loans it is eligible for. While working in the charity sector generally gives more access to this sort of funding, many SMEs may be eligible for funding and lending from governments, local authorities and charitable trusts.
Some financial services are reluctant to become fully involved with crowdfunding. PayPal, a subsidiary of eBay, is one of these services – it froze the money pledged to fund indie game Dreamfall Chapters in September this year, and did the same with Icelandic email client Mailpile’s $45,000 in crowdfunded money.
Both of these have been resolved and PayPal has released a statement highlighting the fact that the crowdfunding model is new and therefore “open to abuse”, but these hiccups demonstrate the importance of cultivating support from the companies your business may come to depend on.
Through clever decisions and a lot of good luck, crowdfunding platforms have evolved from being an interesting by-product of online collaboration to a powerful tool used to make great ideas work. Each of them began as a small venture – developing an idea, finding investment, implementing strategy. As well as using crowdfunding to finance projects, small businesses should look to the crowdfunding platforms themselves as examples of extremely successful start-ups.
Alexandra is a consultant with Christie+Co, a business brokerage company. She writes on topics such as business development, startup expansion and business investments. She is based in Oxford, UK.