Is Crowd Funding Viable? Best and Worst Practices

During PICNIC 2010 last week I attended the session Crowdfunding: The Financial Solution for the Creative Industry, it was an interesting presentation/discussion with crowdfunding experts who shared their best practices and visions of the future. Discussions emerged on how to create better (financial) solutions for the creative industry. Roy Cremers and Valentine van der Lande were two of the experts on crowdfunding who presented their ideas.

Roy Cremers works as a staf member at Amsterdams Fonds Voor De Kunst (Amsterdam Arts Foundation), the focuses on development, reinforcement and versatility of the arts in Amsterdam. They’re realizing these missions by giving financial contributions to projects of artists, institutes and other initiators. Every projects starts with an idea, on their online platform you can present this idea and start looking for people who want to support you financially. As a donator you will get a reward in return. The finance of the art projects partially come community funds and the rest from crowdfunding.

Valentine van der Lande is the CEO of Tenpages, a crowdfunding platform for writers to-be. If you want to be a published author but have a hard time finding a publisher, you can upload ten pages (or more) of your manuscript and let readers invest in you. Readers can buy a share (5,- per share) and the goal is to sell 2000 shares within four months. If this goal is reached Tenpages guarantees that your book will get published and sold in the book shops. As a shareholder you will receive a part of the revenue when the book you invested in becomes a success.

These two initiatives are examples of how to work you way around the bank, instead of trying to get a loan with interest try to find people to fund your idea. The question that arises with the emergence of these funding platforms is, how viable is crowdfunding? A good example on how crowfunding can go wrong is Sell-A-Band, a platform for music artists that just filed for bankruptcy earlier this year. The question is off course, where is all the investment money?

The concept of crowdfunding can be seen as part of crowdsourcing, to use ‘the crowd’ to obtain ideas, feedback and solutions in order to develop corporate activities. The term ‘crowdsourcing’ has been first used by Jeff Howe and Mark Robinson in the June 2006 issue of wired magazine. Raising funds by tapping a general public (or crowd) is the most important element of crowdfunding. This means that consumers can volunteer to provide input to the development of the product, in this case in form of financial help. From this perspective, crowdfunding is a subset of crowdsourcing. (Lambart & Schwienbacher, 2010). Wojciechowsky (2009) argues that social networks can become a worthwhile model of money collection for many charity organizations and NGOs. In their study Lambart and Schwienbacher investigate characteristics of crowdfunded projects and drivers of success, their results indicate that much of the funds provided are either donations or are entitled to receive a final product created by the project, rather that equity or cash payments. Also crowdfunding initiatives that are structured as non-profit organizations tend to be significantly more successful that other organizational forms. This finding is in line with the theoretical arguments posited by Glaeser and Shleifer (2001) that presume that non-for-profit organizations may find it easier to attract money for initiatives that are of interest for the general community due to their reduced focus on profits.

I also found a strange example of crowdfunding that I didn’t want to keep from you. My Free Implants is a website based on the social networking model. The service purports to be an alternative to tradition cosmetic surgery financing methods. Woman participate on the website with the main goal of raising money to fund a breast implant procedure through online donations. A spokesman for myfreeimplants.com said: “We are dedicated to providing everyday women with the opportunity to boost their self-esteem and enhance their physical beauty through cosmetic surgery at no cost. To date we have helped tens of thousands of women raise over £4.5m towards their cosmetic surgery goals.” But the way the website turns out to regulate itself is that the woman with the least boundaries fund their boobs the quickest. They are chatting, flirting and sending naked pictures and videos of themselves to strangers in return for a donation. Woman spend several hours a day online interacting with unknown ‘benefactors’. Once contact has been made through chatting, private messages or webcam encounters, men can agree to make bigger donations in return for steamy pictures and videos. Many of the women even post a “menu” of services they are willing to provide which include x-rated chats and sexy online games.

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Glaeser, E.L. and A. Shleifer (2001). Not-for-Profit Entrepeneurs. Journal of Public Economics 81, pp. 99-115.

Howe, J (2008). Crowdsourcing. Why the Power of the Crowd is Driving Future of Business. New York, Three Rivers Press.

Lambert, T. and Schwienbacher, A. (2010) An Empirical Analysis of Crowdfunding. Social Science Research Network, March.

Wojciechowski, A. (2009). Models of Charity Donations and Project Funding in Social Networks. Lecture Notes in Computer Science 5872, pp. 454-463.