Crowdfunding: a New Method of Raising Financial Capital

Crowdfunding is a new fundraising practice that has evolved very fast and has spread globally. In a span of few years, it has gone from a method to collect money for making music projects to one of the most important U.S. economic initiatives (the Jump-start Our Business Startups, JOBS Act) for raising capital (equity funds) for entrepreneurs and small and medium enterprises. In simple terms, crowdfunding is a way of fundraising in which creators/entrepreneurs, using the Internet, tap into larger groups of people (“crowds”) in order to make new projects and bring ideas to market. Music albums, films, sculptures, art festivals, tv shows, watches, video games, smart phones and all other sort of creative ideas have been funded with this method in the past decade. According to a recent industry report, in 2012 “crowdfunding platforms raised $2.7 billion (an 81% increase from 2011) and successfully funded more than 1 million campaigns in 2012.” (Massolution 2013)

Not surprisingly, this new method of raising financial capital emerges in the context of the new economy and precarious labour in which income inequalities are blatant and access to economic assets is limited. Crowdfunding has evolved as a solution to circumvent the barriers that lack of money represents for the development of new projects and innovations. (Schwienbacher and Larralde 2012; Belleflamme et al. 2013; Agrawal, et al. 2013b) Creators/entrepreneurs use crowdfunding as a means to acquire financial capital and get the money they need to start making their ventures. In a span of a decade, several websites such as ArtistShare (2003), Sellaband (2006), IndieGoGo (2008), and Kickstarter (2009) have appeared for supporting the crowdfunding process of creative entrepreneurs. They provide platforms that, integrating the features of social network sites and the ones of online payment systems, allow creators/entrepreneurs to propose an idea to large groups of individuals, audiences, or fans that can fund it with different amounts of money (usually many small amounts). Although initially the online platforms were designed for musicians who wanted to raise money to produce their new albums with the help of their fans (e.g. ArtistShare, Sellaband), very rapidly a variety of platforms emerged for supporting the development of all kind of ideas across multiple domains such as the arts, technology, design, videogames, and civics.

The fast evolution of the new method of fundraising has called the attention of the popular and industry press, and hundreds of articles, notes, and blogposts have been written about crowdfunding. As with previous narratives about the Internet age several writers have claimed that the new method of financing is a “revolution” transforming business around the world. The poster child of this “boom” has been the Kickstarter platform. Technology journalists and Sillicon Valley entrepreneurs have described this platform as a laboratory for ingenious products, a place for finding new markets and connecting to consumers, and a space for an explosion of creation and invention. (Adler 2011) Cultural journalists have focused on the artistic and creative goals of Kickstarter and have argued that crowdfunding follows the logic of the gift and funders do not have an economic incentive. (Wortham 2012) Still other journalists have emphasized crowdfunding as new method for bringing artists and their fans/audiences closer together for financing new projects. (Economist 2010) Aligned with a techno-determinist narrative, even books have appeared. Lawton and Marom wrote “The Crowdfunding Revolution: Social Networking Meets Venture Financing,” (2010) and argued that crowdfunding is the natural evolution of free markets. According to them, the paradigm shift of crowdfunding encourages business to be more active in the use of their connections through social media for raising money and cultivating communities of costumers. (Lawton and Marom 2010)

However, given the fast development of crowdfunding, theory and criticism have been behind the new practices and technologies. The few critical literature on crowdfunding remains in the popular press and has focused its criticism in projects financed via the Kisckstater platform and the reward-based model of crowdfunding. In an article in the Fast Company magazine, Bogost (2012) pointed out the lack of quality (and lack of need) of the products that are being produced, and highlighted the spectacular and “reality show” ethos of the crowdfunding process. In another critical piece that appeared in the New Republic magazine, Malone (2012) attacked the lack of wisdom of the “crowds” that participate in Kickstarter projects and pointed out its lack of diversity, independence, and descentralization of the successful projects. Criticizing the little democratization of innovation she stated that the Kickstarter “naturally favors groups with strong social-media followings and the capability to make a captivating video pitch, offering quirky perks for those who chip in.”

Definition and history of the term

The history of the crowdfunding term can be understood as part of the broader historical and entrepreneurial narrative of the Internet and, particularly, of the Web 2.0 and social media. Its roots can be traced to the notion of “crowdsourcing” that became popular in the first decade of the twenty-first century. “Crowdsourcing” consists in leveraging the power of larger groups of individuals (“crowds”) to obtain ideas, feedback, and solutions to develop corporate activities (Bayus 2013; Howe 2006, 2008; Kleemann et al. 2008). Proponents of “crowdsourcing” built on the so-called “wisdom of the crowd” argument developed by James Surowiecki (2004). According to this argument, a larger group of individuals can be more efficient than a single individual or small team in solving problems, forecasting, and taking decisions thanks to the power of collective thinking. Wise crowds are characterized by diversity of opinion, independence, decentralization, and aggregation. (Surowiecki 2004) It is precisely this “crowd,” understood as individuals with access to the Internet and spare money, the one that is tapped by creators/entrepreneurs in order to raise financial capital for their projects in the crowdfunding process.

However, some scholars have highlighted an important difference between crowdfunding and crowdsourcing processes in relation to the structure of participation and control over the means of production. Daren Brabham, a communication researcher, for instance, has explained that while “crowdsourcing is a blend of top-down managed process and bottom-up open process, with the locus of control over production residing with both the organization and the crowd in a shared, give-and-take way” (38); crowdfunding is “distributed financing or group investing” (39) and the crowd contributes their money instead of their intellect to the project. According to Brabham, “the intellect required of the crowd in a crowdfunding arrangement is to choose a product to support” (39) and the control over production resides in the creator/entrepreneur.

Other scholars, industry insiders, and journalists, have remained more flexible about the similarities between the two processes, and given the rapid evolution of crowdfunding as a practice and its multiple implementations around the globe, have emphasized their correspondences with crowdsourcing. Jeff Howe, the journalist that coined the term “crowdsourcing” in 2006, explained in his book Crowdsourcing: Why the power of the crowd is driving future of business (2008): “crowdfunding has more in common with the other forms of crowdsourcing than is immediately apparent. First, it radically shifts the organization of an existing field. Two, it flattens hierarchies, by directly connecting people with money to the people who need it. And crowdfunding shares crowdsourcing ‘s generally democratic impulse.” (247)

It is precisely the shifting in the organization of the financial field and the flattening of hierarchies what has inspired most of the new research on crowdfunding in the academic world. The emergent scholarly definitions of the concept that can be found in book chapters, working papers, and journal articles, emphasize the following characteristics of crowdfunding: lack of standard financial intermediaries, use of online social networks and platforms, and small contributions from a large group of individuals or audiences (“crowds”).(Schwienbacher and Larralde 2012; Belleflamme et al. 2013; Agrawal, et al. 2013b; Mollick 2013, 2014) In “The Dynamics of Crowdfunding: An Exploratory Study,” (2014) Mollick synthetized a definition of the term that focused on entrepreneurial finance. According to him, “crowdfunding refers to the efforts by entrepreneurial individuals and groups – cultural, social, and for-profit – to fund their ventures by drawing on relatively small contributions from a relatively large number of individuals using the internet, without standard financial intermediaries.” (Mollick 2014)

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