Crowdfunding, you mean like Kickstarter?

Even though it feels like crowdfunding has been around forever, I still often find one of two reactions when I discuss it with business people.

Source: www.sueddeutsche.de

The first (increasingly rare) reaction comes from those who haven’t yet heard of crowdfunding. The response from these people is typically one of polite but quickly-passing interest. The second group responds with “you mean Kickstarter?” and go on to tell me about a friend’s experience with their Pebble smart watch.

Very few people seem to appreciate the true scale of crowdfunding, which Massolution estimated to exceed $5 billion in 2013 and the World Bank predicts will reach $100 billion in 2025. Kickstarter, often the poster child for Crowdfunding, isn’t even the largest platform. While it has raised over $1.8 billion to date, this pales in comparison with US-based peer-to-peer lending sites such as Prosper (over $4billion) and Lending Club (over $9 billion, $1.6 billion of which was raised in the last quarter alone).

But people basically pre-purchase things, right?

There are several types of crowdfunding. Sites like Kickstarter, IndieGoGo, and RocketHub typically offer rewards, finished products, or other material benefits for contributing towards new products. Other platforms take a more transactional or economic view, facilitating donations in the form of commercial interest-based loans (e.g. Lending Club) or the sale of business equity in exchange for financial contributions (e.g. CrowdCube, Seedrs,).

Many also cater to fundseekers who offer no promise of financial or material reward. Instead, donors are encouraged to contribute to help those in need (e.g. Fundly, Crowdrise) or encourage economic growth in developing countries (e.g. Kiva). More recently, crowdfunding plugins have been used to embed fundraising directly within a company’s own website (e.g. IgnitionDeck).

Each of these offers their own advantages and attracts different types of backers. Typically, as rewards get more financially quantifiable, interaction with backers tend to be more formal and distant. As rewards become less tangible, backers tend to expect more responsive and personal dialogue from fundseekers.

Is this all about the rise of the Amateur Investor?

Much has been said about crowdsourcing and the rise of amateurism, e.g. amateur programmers, amateur photographers, etc. It’s therefore sensible to think of crowdfunding as the growth of amateur investing.

However, this doesn’t tell the full story. If it did, companies like Apple and Sony would be using sites like Kickstarter to gauge product interest, test ideas and generate income earlier in development cycles. Rather, the large majority of crowdfunding is characterised by an independent ideology.

Take the example of the Oculus Rift Virtual Reality development headsets, a project that received almost $2.5 million on Kickstarter. Many backers didn’t just want a headset, they wanted to be part of a revolution in Virtual Reality. These same backers were disillusioned when Facebook later acquired Oculus VR for $2 billion. This should arguably have been a cause for celebration. Yet these backers hadn’t pre-purchased a product, they had paid to participate in something – something that was no longer theirs.

Where’s this all going?

The idea that consumers would pay to be part of a crowd, that they would pay simply to participate in something, is powerful. It’s not simply an evolution of business practices; it’s a new phenomenon that presents new opportunities. Backers are not necessarily buying a product they may be booking a front seat for the future journey of a business. Further, this may not be a silent seat, they may expect to be heard when it’s time to make decisions (collectively, if not individually).

In return, businesses can potentially open up a market of hybrid investors/consumers with an unparalleled level of loyalty, shared vision, and longevity. The business world is only beginning to scratch the surface of what this means The true potential of crowdfunding is only beginning to be discovered.

Dr Rob Gleasure is a Lecturer at University College Cork, where he teaches a range of undergraduate and postgraduate courses relating to ebusiness and online crowd behaviour. Rob is also a Lecturer for the IMI MBS* in Digital Business. Rob’s research focuses are on design science, the semantic web and Internet of Things and crowdsourcing/crowdfunding. Rob has published work on these topics in a range of international journals and conferences. Rob performs consultancy work in the areas of interaction design, design thinking and business process design.