Crowdfunding: from 1783 to today – and why it’s not just for start ups
Crowdfunding is a method to collect many small contributions, by means of an online funding platform, to finance or capitalise an enterprise or business idea, and has become a buzzword of the last 20 years.
However, it’s not a particularly modern concept.
Let’s rewind time. The Statue of Liberty was partially crowdfunded after the American Committee of the Statue of Liberty, tasked with raising the money needed for the statue’s construction, fell short by more than a third, and the New York Governor rejected a request for city funds to pay for it.
The renowned publisher Joseph Pulitzer launched a fundraising campaign for the statue in his newspaper, The New York World. In just five months, the crowdfunding campaign raised US$101,091 from more than 160,000 donors, including children, business owners, normal working people and politicians.
More than three quarters of the donations were of less than a dollar, but in a short time they raised enough to cover the full balance needed to complete the statue.
What is crowdfunding?
There are three main types of crowdfunding:
People invest in exchange for equity (shares or a small stake) in the business or project. Just like investing in other types of shares (apart from community shares) if it is successful the value goes up. If not, the value goes down.
Investors receive their money back with interest. Also called Peer-to-Peer (p2p) lending, it allows for the lending of money while bypassing traditional banks. Returns are financial, but investors also benefit from contributing to the success of an idea they are passionate about.
Rewards or donation based crowdfunding
People invest simply because they believe in the idea. Rewards like free gifts, event tickets, or acknowledgements can be offered to investors. Returns are considered intangible. Donors have a social or personal motivation for putting their money in and expect nothing back.
Crowdfunding has changed a little since the building of the Statue of Liberty, although the basic premise is still the same. Both Pulitzer’s campaign and modern day crowdfunding sites use a single collection point to raise money from a very large pool of donors, each pledging as much or as little as they wish. And like many modern crowdfunding campaigns, Pulitzer offered rewards to donors, in his case, gold coins for the largest donation.
However, whilst possibly one of the most famous, the Statue of Liberty was not the first crowdfunding campaign.
How crowdfunding works – then and now
In 1783, Mozart wanted to perform three recently composed piano concertos in a Viennese concert hall. He published an invitation to prospective backers offering manuscripts to those who pledged – much in the same way that many campaigns on crowdfunding platforms today offer backers the first chance to get their hands on products.
Also in common with many campaigns today, Mozart failed to reach his funding goal on his first attempt. A year later he tried again and 176 backers pledged enough to bring his concertos to life. He thanked them all in the concertos’ manuscripts.
Modern crowdfunding gained traction in the United States when Brian Camelio, a Boston musician and computer programmer, set up ArtistShare in 2003. It started as a website for musicians to seek donations from fans to produce digital recordings, and has evolved into a fundraising platform for film/video and photography as well as music.
Thanks to ArtistShare’s success, more rewards-based crowdfunding platforms were launched – you can find more information about some of the UK platforms on the website of the UK Crowdfunding Association.
It’s taken a long time for crowdfunding to reach the level of popularity that it now experiences, with the amount invested doubling year on year, with an estimated figure of more than $35 billion raised in 2015.
The popularity that crowdfunding has experienced has led to some campaigns seeing phenomenal amounts donated to their projects and huge numbers of people flocking to get involved and to invest.
One particularly successful crowdfunding campaign in the USA, for example, was for the Coolest Cooler, which raised $13,285,000 from 62,000 backers in 2014. The company’s funding goal was a much more modest $50,000.
Thinking of launching your own crowdfunding campaign?
The reality is that a significant number of crowdfunding campaigns fail to reach the targets set by the business owners. To run a successful crowdfunding campaign, it’s not enough to have a robust business plan: “you don’t want to merely sell people a product, you want to sell them a dream,” says one successful campaigner.
New rewards-based crowdfunding sites are also emerging that focus on a narrow product category or niche market.
Veeqo – a true British tech startup
“Veeqo has continued to show meaningful success since its earliest seed round in 2013 valued at just £270,000 but backed by retail mogul Tom Singh. Crowdfunding investors became part of the journey of a fledgling businesses as the Veeqo team conquered a further five rounds, even overfunding to £670,000 in 2015 from a £250,000 target. Veeqo is exactly why equity crowdfunding is instrumentally important to the future of the early stage investment and why sophisticated investors should seriously look to add this asset class to their broader investment portfolio.”
Jeff Lynn, CEO and Co Founder of Seedrs
Equity crowdfunding considerations
Whether for an idea-stage start up or a publicly traded company, there are plenty of investors now actively looking for opportunities to buy into. People buy into ideas that spark the imagination, that meet a market need, and that are well thought out and articulated.
There are no rules saying that established businesses cannot benefit from this and – in fact – many are be better placed to plan and run a crowdfunding campaign than a smaller or less well-established business.
There are many things to think about before launching an equity crowdfunding campaign, and businesses should always consider the alternatives, which are ever increasing.
To find out more about both debt-based and equity-based crowdfunding, visit the UK Crowdfunding Association, or for information on debt-based crowdfunding visit the Peer-to-Peer Finance Association.
You may also like to visit this page which includes a short video guide to crowdfunding.
The Business Finance Guide is a great place to start your search. Use the simple Journey Tool to map your current business needs or plans, against your stage of development, to narrow down the options available, and to uncover further, independent information and advice.