Internet penetration in all parts of the world has enabled crowdfunding to become a global phenomenon. Crowdfunding involves the funding of a project or business venture by motivating large numbers of people to provide monetary contributions. This phenomenon has the power to change industries and we are already witnessing evidence of this right now.
The three players that make crowdfunding possible are the project initiator who proposes an idea, the people or groups who support the idea, and the platform that makes the connection between the initiator and the supporters possible. There are now three types of crowdfunding models that are currently in practice: reward-based, equity-based, and debt-based.
The most common form of crowdfunding is reward-based and can be seen on popular platforms like Kickstarter and Indiegogo. The project initiator sets a financial goal with a specified time limit and markets the idea to as many people as possible. People can then donate certain amounts of money in exchange for various gifts related to the size of their donations. While this model has been particularly popular with art and design projects, there has been backlash over projects like Oculus Rift that was just sold to Facebook for $2 Billion. The Kickstarter supporters of Oculus Rift only received an early version of the virtual reality headset and missed out on the huge financial success that came thereafter.
The concept of equity-based crowdfunding has evolved to allow people to receive actual shares in a company rather than gifts. This is now redefining how companies raise capital and there is a push to harness the power of many as opposed to venture capital from a few. Similarly, credit-based crowdfunding enables people to pool their money together and then have that money leant to various borrowers at agreed upon terms. It is clear that venture capitalists and bankers could be facing a new form of competition in the future.
The power of crowds is undeniable and has the potential to change the way entire industries operate. Just recently, New York based Lexshares launched a platform to give investors the opportunity to support those who cannot afford the legal costs of lengthy court battles. If the case is successfully won, then investors get a piece of the action. The power of crowds, however, does not stop with crowdfunding itself and I will be exploring how crowdsourcing works in my next blog: Power of Crowds: Part II.
For more information on the power of crowds, please refer to the following articles:
Crowdfunding Becomes Global Phenomenon, Forbes, Devin Thorpe, September 29th, 2014 (http://tinyurl.com/jvlckr4)
Anyone can now crowdfund their legal battle, Springwise.com,November 28th, 2014, (http://tinyurl.com/klcocnm)
The 10 Most Funded Kickstarter Campaigns Ever, Nina Zipkin, Updated September 2nd, 2014 (http://www.entrepreneur.com/article/235313)
For more information about the Corvinus Executive MBA blogger, go to https://www.linkedin.com/in/kevinmjackson1.