What is crowdfunding?
Crowdfunding is based on the principle of raising relatively small amounts of money from a large number of people. So, for example, if you needed £10,000 to start a new project, instead of borrowing the whole amount from one bank, a thousand people could provide £10 each.
What are the origins of crowdfunding?
Although there are examples of similar models of business financing as far back as the 17th century, crowdfunding is a product of the internet age. The first recorded use of the word was in 2006 and since then, myriad websites (or ‘platforms’, as they are formally known) have sprung up to help connect people who need to raise funds (‘creators’) to those who might want to provide funds (‘backers.’) Leading crowdfunding platforms include: www.kickstarter.com, www.crowdfunder.co.uk and www.wefund.com
How popular is crowdfunding?
Crowdfunding has exploded over the last few years. Banks have never been very keen to lend to start-up businesses because they are inherently risky. But since the Financial Crisis of 2008, banks’ aversion to risk has become even more pronounced and this has been compounded in the UK by severe cuts in arts funding. Consequently, entrepreneurs (including many creative people) have tried to find finance via alternative routes and crowdfunding has become a particularly popular option. Forbes magazine estimated that crowdfunding raised over $5 billion globally in 2013 and in the UK, the equivalent figure was estimated to be around £400 million.
How does the crowdfunding process work?
Crowdfunding starts with the creator. This could be a musician who wants to record an album of their own songs but can’t afford the studio fees. Or it could be a TV producer who needs funds to film, edit and promote a ground-breaking documentary. Or maybe an author who is fed up with rejection letters and wants to self-publish their book.
The first step is to choose a platform and submit a project. This is a description of your idea, usually with a promotional video, that will encourage backers to pledge money. You will also set a target amount and an end date for example, £20,000 by December 31. Typically, your project will run for between four and eight weeks, during which time you will spread the word among your friends, family, clients and anyone else who you think might be interested. The beauty of the web is that you have a global audience – assuming you can drum up interest.
Backers pledge donations online, using PayPal or debit/credit cards, and then, hopefully, by your end date you will have achieved your target amount and you can start to bring your plans to life.
Are projects guaranteed to gain funding?
No. In fact, many projects fail to attract funding altogether. One reason for failure is that creators don’t hit their target. Some crowdfunding platforms are based on the ‘all or nothing’ (AON) principle, so, using the example above, if you secure pledges of £19,999 by your end date, you will not receive a penny.
Other platforms have adopted the ‘Keep It All’ (KIA) model in which the creator receives whatever funds are pledged, even if the target is not met. A recent study of some 23,000 crowdfunding campaigns revealed that AON-based projects are more likely to be successful because creators are more meticulous with their descriptions and justifications, which makes backers more inclined to pledge funds.
What makes a successful project?
One of the greatest misconceptions about crowdfunding is encapsulated in the phrase ‘a great idea speaks for itself.’ Your project may well be the finest film, album, book or play in history, but if you just submit your project and wait for the money to roll in, you will be disappointed.
Successful projects are characterised by very active and innovative marketing on the part of the creator in which social media often plays a crucial role in raising awareness. In addition, ‘old school’ techniques are used, such as using the phone, meeting in person, leaflets, PR stunts, throwing a launch party… whatever it takes.
It is imperative that your target is achievable and can be justified but equally, you need to be realistic about how many people you can convince to make pledges. Not every person who says ‘yes’ by email or via Facebook will actually honour their intentions. You can ask friends to encourage their friends, but people who don’t personally know you will only make a pledge if your project is extremely compelling.
So the creator gets the funds, but what’s in it for the backers?
People you know might donate money for purely altruistic reasons and expect nothing in return. But to attract larger numbers of backers, you will need to offer an inducement. This can either be a reward or equity.
A reward can be anything from a credit on your album or in your film to a free signed copy of your novel or a handful of tickets to see your play. Alternatively, you might want to tempt backers with a promise of equity: either a share in the profits of your venture or your business as a whole in exchange for a specified amount of money.
Are there any notable examples of successful crowdfunding?
Plenty. The most well known examples of successful crowdfunded projects often involve huge amounts of money (e.g., $40 million dollars to develop a computer game); sheer quirkiness (e.g., a museum of miniature exhibits) or already-famous creators (such as filmmaker Spike Lee and singer Amanda Palmer).
Of course, the vast majority of successful projects are more modest, and every platform website has examples of how a few thousand pounds have helped creative professionals realise their goals. Click on the following links to read more about successful projects.
What is the role of the platform?
In essence, platforms act as financial ‘dating agencies’ because their primary role is to connect creators with backers. Platforms also have a moderating role and ensure that everyone sticks to the rules. Typically, the platform charges a small fee, perhaps 5% of the total funding raised.
Although all platforms adhere to the basic principle of crowdfunding (small amounts from lots of people), each one operates in a slightly different way. As a creator, it is vital that you understand what is expected of you. So, before launching your project, visit various platforms’ websites and carefully read the terms, condition, rules and regulations.
How do I narrow my choice of platform?
There is a huge choice of crowdfunding platforms and it certainly pays to do lots of research before you decide. Some platforms specialise in certain types of projects: property, technology, art, etc. Others are focussed on local community projects, or specialise in helping young entrepreneurs. Most platforms offer crowdfunding for multiple niches and their websites will usually give examples of the categories of successful projects, for example: arts; publishing; music; film and theatre; community; environment etc.
Are any platforms recommended for FEU members?
It all depends on what you want to achieve. You need to feel comfortable with the platform and be confident that it is right for you and your project. A good starting point for your research is the UK Crowdfunding Association. This was formed in 2012 and at the last count it boasted almost 40 crowdfunding platforms as members. Scroll down this web page, read the brief descriptions of each platform and click through to the websites of those that appeal.
The well-established, general platforms (like kickstarter and crowdfunder) have helped many film-makers, playwrights, writers, performers and journalists realise their dreams. But you might also want to consider platforms that specialise in the creative industries. These include:
However, platforms that enable creators to raise funds by selling shares (or ‘equity’) in their venture must be authorised by the UK Financial Conduct Authority. Most platforms, however, are not investment-based and so do not come under the authority of the FCA. In March 2014, the FCA published a document that explains its policy for crowdfunding in detail.
Despite crowdfunding’s lack of regulation, the risks faced by creators (and backers) are small. Even so, if you are going to launch a project you need to be sure that your chosen platform is a reputable organisation with a strong track record. Membership of the UK Crowdfunding Association does not guarantee a successful project, but at least it ensures that the platform follows the industry’s code of practice, which should give you peace of mind.
Find out more about crowdfunding
Crowdfunding has received lots of media attention in recent years. The following links are useful starting points: