Crowdfunding - A straight line connecting the Statue of Liberty, and modern entrepreneurship (4 min read)

The statue of liberty in New York was a present given to the American people by the French people, celebrating freedom and democracy. The statue arrived at the NY port by mid-1885, to find that the pedestal on which the statue was to be placed on, is not ready due to severe financial difficulties. When all other means had proven inefficient, Joseph Pulitzer, the owner of The New York World newspaper, decided to launch a (crowd) funding campaign: “Let us not wait for the millionaires to give us this money,” he declared. Pulitzer promised that each donor’s name would be published in the paper, regardless of the amount. And indeed, after five months, over 160,000 people donated between few cents to one dollar, a total sum of more than US $100,000. A sum that is worth today more than US$2.6m – a very successful campaign even in 2020’s standards.

Crowdfunding - a global phenomenon

Crowdfunding, as illustrated by the statue of liberty story, is all about obtaining small sums of money from a large audience for a variety of projects such as cultural, social, political, environmental, and commercial. Nowadays, it is mainly done via the Internet. According to the Cambridge Centre for Alternative Finance report, the global online volume of crowdfunding reached over US$300b in 2018. The Chinese market was the largest, accounting for 70% of total volume with US $215b, followed by the US with US$60b (20%), and Europe with US$18b (6%). The Latin America region reached over US$1.8b in 2018, with an impressive growth rate of 173%. The Brazilian market leads the region with US$673m, followed by Chile with US$ 289m, Mexico, Colombia, Peru, and Argentina. The Bolivian crowdfunding market volumes account for over US$3m in 2018. 

The four models of crowdfunding

The total volumes associated with crowdfunding, by and large, refer to four basic models; donation, reward, equity, and the lending base. The donation-based model is mainly utilized to collect donations for projects that are philanthropic or civic by nature. In the reward-base model, funds are collected in exchange for non-monetary rewards such as products or services. Participants in both lending and equity-based crowdfunding models expect monetary benefits. In the lending model, individuals lend money to either individuals or businesses for a predefined interest rate and time frame for the payback. While in the equity model, individuals invest in a privately held venture in exchange for shares in the company.

Regardless of the way it is utilized, crowdfunding brings new opportunities to promote economic growth through entrepreneurial activity.

A ‘win-win’ game

Crowdfunding, at its core, is a ‘win-win’ model, where all parties benefit from participating in the process. The three main players in crowdfunding include the fundraiser, the backer, and the platform. The fundraiser is typically an individual, making a public call to finance an initiative, that can be either a for-profit project such as establishing or expanding a business or a not-for-profit project such as collecting money for children in need, communal activity parks, animal shelters, or families affected by Coronavirus pandemic. The backers are defined as individuals providing capital to an online campaign. Backers vary regarding their incentives to participate in crowdfunding activities. The profit-oriented backers will, most probably, engage in for-profit activities such as investing in or lending to a venture, with the expectations for future financial returns, while others may decide to fund a social or cultural project with no financial benefits. All backers, regardless of their financial orientation, benefit from having an impact on local and global markets, promoting industries and goals that are close to their hearts.

Furthermore, research has shown that the contribution itself enhances the backers’ sense of belonging to particular groups and communities. The crowdfunding platforms’ role is to link fundraisers with their potential backers. They enable the exchange of money, but they also have a major role in controlling for the quality of the projects and identity of the participants, thus building trust between parties.

Facilitating Entrepreneurship

Entrepreneurial activity is regarded to be the economy’s locomotive engine. Young business and newly funded startups have a significant role in boosting economic activity. However, to succeed and achieve long-lasting growth, these entrepreneurial firms need access to financial resources, such as debt finance, venture capital, and angel finance, in which many will fail to obtain. In this context, crowdfunding has proven to be a valuable alternative source of capital for entrepreneurs.

Social entrepreneurs, for example, may choose to utilize the donation-based model, while technological ventures may choose equity-based as their preferred model. Franchisees planning on having immediate revenues may find the lending model being the most appropriate one for their business. Regardless of the way it is utilized, crowdfunding brings new opportunities to promote economic growth through entrepreneurial activity.

What is your take on crowdfunding?

Happy to hear about your experience with raising funds or participating in a crowdfunding campaign as a backer or investor.

About Daniel Berliner

I am a research fellow at the Crowdfunding Research Centre at the University of Agder, Norway. My research interests include investor decisions in equity-based crowdfunding and alternative financing, especially in the context of high-technology new ventures.

My research focuses on entrepreneurship, entrepreneurial finance, and fintech. I am a co-author of the “Advances in crowdfunding research and practice” newly (freely accessed) published book.

*** This article was published (Spanish) in the September 2020 edition of Revista Libre Empresa