Crowdfunding - A Useful Concept?
‘With crowdfunding you are allowing people to do something… You have people saying, I believe in you’ - anonymous project developer
The experience of crowdfunding is indeed two-sided: Creators of projects may receive funding and validation whilst simultaneously implementing their idea, whereas funders directly support projects they identify with and believe in. The concept itself is emerging in an increasing globalized world, in which anyone with Web access can play a part as either the creator or funder of projects.
As it is evident that the usual types of funding, such as venture capital, business angels or bank loans are difficult to obtain or simply inaccessible in countries such as Afghanistan – crowdfunding offers a great alternative for both creators and funders. The concept crowdfunding has in fact been in existence since 2006 and evolved from the concept of crowdsourcing, which is linked to making use of the intelligence of the crowd. Within this concept business developers may seek help or advice from the crowd by asking for comments, suggestions, ideas and even answers to unresolved questions related to their business idea. This all draws on the notion of collective intelligence, which the concept of crowdfunding heavily relies upon.
One of the most famous crowdfunding examples is the ‘Pebble Watch’, which aimed at collecting 500,000 dollars and eventually raised an incredible 20 million dollars. This project was recently overtaken by a space combat video game which raised 93 million dollars and is currently on-going on the designer’s own website. The top-ten most successful crowdfunding projects are therefore a range of different campaigns: video games, real estate, movies, technological devices and more. It mainly depends on how they are marketed, meaning how much faith the crowd develops in the project.
Crowdfunding is still developing with a plethora of models existent across the Web. Two main types can be identified and then applied in multiple ways: donation-based (patronage model), or lending based crowdfunding. Within the patronage model funders donate (mostly small amounts) instead of invest in a project and therefore expect no monetary return. These projects find themselves in the humanitarian, for-profit or cultural field, as to which funders look for social validation or similar. The most common method for donation-based crowdfunding is to be found on Kickstarter, with the all-or nothing-funding model, in which creators showcase their project on the platform and hope for their funding goal to be reached. Funders may then support the project which is only successful if the full funding goal is reached, otherwise all donations are returned, hence the all-or-nothing label. The success rate for the completion of projects on Kickstarter is 43 percent.
The second model, the lending model, is less common and yet increasingly successful and may be found across a variety of platforms: Here funds are given as a loan and more information is provided, such as a business plan to foster greater amounts of investments. This model is also represented on rocket hub or indiegogo, where funders donate or invest via the all-and-more fundraising system, where creators are not obliged to give back the money even if the funding goal is not reached. If the project is a success, the funder then expects a rate of return on the capital invested, or possibly requests the product, social good or service which is being promoted. This may also happen in the case of the patronage model, where funders may support the development of a product and expect to receive it after the successful crowdfunding campaign.
In cases of crowdinvesting, a different term for loan-based crowdfunding, choosing the right platform is crucial. Which platform to rely on is not only a question project developers have to decide upon, but also funders or investors need to choose a reliable platform and campaign to invest in. A platform with a venture background may provide better advice for the creator and offer a possible safety net and a trustworthy oversight of the business plan for funders. It is additionally recommended to follow the eggs in a basket approach and invest in several campaigns to minimize the risk of losing all the investment.
Crowdfunding in constantly developing, birthing different models and is adaptive across a variety of platforms. All in all, it helps small projects or business ventures to collect funds through a plethora of funders using the inviting ease of the internet. This relates to the idea that anyone may be involved to either come up with a world-changing idea and receive funding or detect a world-changing idea and support it by investing or donating. It brings people closer together and brings forth multiple positive implications, apart from giving small ventures a chance on realizing their project. Whilst creators may receive funding, they can simultaneously showcase their project and market their idea. Creators may additionally check the demand for the product, create a hype around it and connect with like-minded individuals online. All this occurs whilst soliciting funds and establishing a possibly world-changing idea. However, this implies work. Particularly, the marketing side of the crowdfunding campaign signifies a thought-process possibly inhibiting the realization of the actual project itself. It is important to note that investors or donators are only motivated to invest if 25 percent of the project has already been funded. The first round of funding will have to be made by the friends and family of the creator, which may turn out to be more difficult than expected. Thus, before initiating a project, a marketing plan has to be made and the right platform for the project to be chosen.
Apart from the motivation of soliciting funds, a study was conducted at Northwestern University in Illinois in 2011 aimed at finding out the motivation for crowdfunding amongst both creators and funders. They detected that the social interaction is the main motivator for both sides: therefore, “strengthening commitment to an idea through feedback and feelings of connectedness to a community with similar interests and ideals” drives both creators and funders. It simply connects, as to which the geographical proximity is crucial. This proximity helps to avoid or reduce risks brought forth by crowdfunding, the most prominent being the information asymmetry. The funder must rely on the information given by the creator – if he is in close proximity, a relationship might be established and this particular risk minimized. A supermarket in a town in Germany aiming at offering package-less products might thus have a better chance simply because it can allocate funds from neighbors and friends. The geographical proximity theory states that investors in early stages of entrepreneurial ventures often turn out to be local, as this simplifies collecting information, monitoring and offering input - factors which are sensitive to distance.
Crowdfunding as a concept could help small ventures and businesses in Afghanistan collect funding quickly, a process which is currently depicted by hurdles and increasing governmental interference. With crowdfunding, individuals themselves may decide on how to initiate development and showcase their ideas on a crowdfunding platform. Thus in theory, the concept of crowdfunding could be immensely crucial for Afghanistan, a country lacking meaningful foreign investment and entrepreneurial motivation. However, currently certain regulations and theories predict that crowdfunding will not arrive in Afghanistan any time soon, nor bring forth the desirable outcome. For one, the theory of geographical proximity might lead to difficulties, as investors cannot monitor the process from afar. Second, faith in Afghan-based ventures might be depicted by suspicion, as centuries of war have influenced necessary regulatory systems. Third, access to online platforms is complicated by limited access to the Web, which has an implication on the successful implementation of the crowdfunding campaign. Both the creator cannot hold up a successful online campaign and the funder may not properly be able to access all available projects.
Currently, most Afghan-based campaigns are patronage campaigns, in which social projects ask for donations. Good examples are the Afghan Tree House on Indiegogo or projects to be found on the donation-based StartSomeGood platform. On kabulfounderinstitute tech-related start-ups may raise funds and showcase their idea. However loan-based crowdfunding in Afghanistan is limited, due to the fact that reliable crowdfunding platforms and affordable Internet access are necessary. These two factors combined could positively influence home-based projects which do not have access to traditional means of funding. In the process of establishing crowdfunding in Afghanistan, Foreign Direct Investment and entrepreneurial engagement could be fostered – which brings back the very roots of crowdfunding.