Crowd Funding – An Introduction

The background

I initially started this blog post with a breakdown of peer to peer economics platforms, and how I hoped such things would change the market, and society. But to be honest I think most people only want to read 500-800 words of another person’s thoughts.  So, I’m going to post one on each tool, with some specifics in mind.

The first is crowd funding, a topical example of what I like to think as the democratisation of the economy.  The democratisation of the economy is the concept I was beginning to discover at the end of last year, before coming across Jeremy Rifkin’s book “The Zero Marginal Cost Society”.

Hypothesis

The basic premise of the democratisation of the economy (similar to The Zero Marginal Cost Society) is that with the advent of mass communication, and as a result efficiency in collaboration, innovation soars, costs plummet, and society gains.

What is it?

As with most things, a succinct explanation of what crowd funding is can be found on its Wikipedia page. My quick breakdown follows:

  • The traditional view of crowd funding involved charitable donations to a cause advocated by an individual on a website, like Kickstarter.
  • Start-ups slowly began to appear on these websites offering what is known as reward or prototype based crowd funding. The audience of the internet could, if it deemed the project worthy, donate to these start-ups and in return would receive a gift or prototype.  Perhaps the most famous example of this kind of project is Tile.
  • Alternatively equity crowd funding involves a start-up business with limited capital seeking capital contributions from a large pool of investors.  Start-ups post interactive campaigns on a website such as Crowdcube, or in New Zealand PledgeMe or Snowball Effect.  The fabulous audience of the internet then chooses whether or not to invest in this concept.     The intention is to allow what are inherently risky, early stage businesses, the ability to raise capital where no particular investor is required to put a significant amount at risk.

New Zealand – challenges for the crowd

There is a lot of scepticism in the market surrounding the crowd funding model, and whether it will really capture some of New Zealand’s private equity/venture capital funding. Throw in stock exchange operator NZX’s proposal to launch a new market, the “NXT”, aimed at start-up-esk businesses, and I do see where people’s concerns come from.

I recently attended this year’s NetHui where the fiercely intelligent Anna Guenther of PledgeMe discussed the Financial Market’s Authority, and touched on the possibility of a secondary market to trade the shares investors obtain from equity crowd funded businesses – a potential direct competitor of the new NXT.

The case for the crowd

The case for the crowd is both ideological and global.

Ideologically crowd funding stands for the embodiment of Generation Y’s spirit, it’s no longer about mass, Richard Hamilton/Pop Art, consumerism – ie about being the owner of a can of coke (not that there was anything wrong with that generations’ view). The shift taking place is one of production, or as Rifkin puts it, of people being both consumers and producers, “prosumers”.

Crowd funding is emblematic of this shift in viewpoint as it engenders production via the crowd. People feel connected with what is being produced, and have some capital in the game. As hopefully other blog posts will irradiate this shift is cultural, technological, and optimistically I think, economic.

The second is the figures internationally.  Take for example the recent success of a platform like Seedrs which is now turning over 1 million pounds a month, and has just successfully facilitated the funding of publicly listed Chapel Down.

Concluding thoughts

As with all novel forms of capital raising, or transactions (Bitcoin), the proof will be in the execution. It’s exciting to think how crowd funding will interact with venture capitalists in the long run, is there an inherent tension there?  Or do the platforms provide a new vetting procedure?

I remain cautiously optimistic as to what the future will hold.

 

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