The Evolution of Crowdfunding
Originally published on Spacedventures.com
The crowdfunding landscape is incredibly dynamic. I believe that it’s an industry unlike any other, born out of need and built up by creativity. Equity crowdfunding is adapted from a rewards-based model, where contributors who are willing to accept the risk of loss essentially invest money in exchange for partial ownership of a company rather than a product or service. Simply put, it’s the sale of securities in a private company with the hope that someday they become much more.
Although it seems like a new concept, it’s not. Crowdfunding goes back at least to the 1700s.
That’s when The Irish Loan Fund was established by author and Irish nationalist Jonathon Swift as a way to provide loans to poor but creditworthy people in Dublin. The Fund was successful and sparked a wave of imitations.
By 1843, there were approximately 300 loan funds in Ireland alone. The “crowd” part of the funding for Ireland’s loan funds came in the form of donations from wealthier citizens who saw it as a way to charitably help the poor.
The Inception of Modern Day Crowdfunding
The first recorded successful instance of crowdfunding occurred in 1997 when the British rock band Marillion funded their reunion tour through online donations from fans who were eager for them to come tour in The United States.
Keyboardist Mark Kelly sent out an email to his 1,000 person mailing list, telling them that the band would lose about $60k if they went on tour. The fans said: why don’t we raise the money?
One fan even volunteered to put the money in escrow in his bank account in North Carolina, to be returned if not enough was raised. Kelly was able to raise the money through his email campaign and the band went on tour. But the impact of that simple email resonated far beyond a single concert tour. Crowdfunding had officially been invented (and perhaps even email marketing).
Inspired by this innovative method of financing, ArtistShare became the first dedicated crowdfunding platform — focusing on musicians who wanted to raise money either to produce albums or go on tour — way back in 2001.
Gradually, others began to catch on. If it worked for the music industry, where else could this model be applied? Thanks in large part to the internet boom plus social media, it became possible to harness the power of an audience often with little to no money upfront. For many, crowdfunding shone like a beacon of hope that offered a new and innovative way to make their dream projects come to life.
The Rise of Crowdfunding
The crowdfunding industry has quickly emerged as a popular option for entrepreneurs to validate their ideas, gain exposure and get funding. Crowdfunding revenue tripled from $530 million in 2009 to $1.5 billion in 2011 and is expected to continue growing rapidly in the coming four years.
Boasting a 74% compounded annual growth rate, crowdfunding is an incredibly important funding option because other funds (such as Small Business Association loans) have become significantly less available in the past few years. The market crash of 2009 has also made it very complex to raise funds.
Today, the top crowdfunding categories are tech, design and games, in that order. Of course, Spaced Ventures is at the leading edge of providing unique growth opportunities in the ultimate tech space (pun intended).
Big Brother Support
In April of 2012, President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. Also known as “the crowdfunding bill,” the JOBS Act aims to lessen regulatory burdens on small businesses and legalized equity crowdfunding in the United States. This includes removing the ban on a general solicitation that prevents entrepreneurs from publicizing the fact that they’re raising money for their business.
Though the JOBS Act was signed into law in April of 2012, the Securities Exchange Commission is still in the process of setting regulations to ensure that both investors and entrepreneurs remain protected.
Crowdfunding has always been less about instant gratification, and more about the long haul, which is perhaps why it deviates a bit from the norm in American culture. In both rewards and equity campaigns, backers have to wait to see if their investment will produce a return or a loss while companies have to continually refine their products.
The Opportunity Ahead
The buffet of investment opportunities is enhanced in the crowdfunding process and allows investors to be more selective with the investment opportunities they’d like. Given that it is online and the selection is at the investor’s fingertips.
I believe we’re at the precipice of a historic turning point in the venture capital world. A multi-million dollar upper limit opens the door for much more established companies to enter this playing field for the first time. Evidence suggests that investors who are registered on crowdfunding platforms are hungry for more opportunities.
It is starting to become a common watercooler conversation to see a million-dollar raise fill in a single day. And the benefits for founders — unprecedented access to capital with the implementation of the JOBS Act, free and widespread publicity, and many more — make pursuing crowdfunding opportunities seem like an absolute no-brainer to me.