[This article was originally published on Social Media Week Global blog]
Many refer to crowdfunding as a “new phenomenon” (or – at worst – the “new bubble”). However, it is not as new as we may think; as a concept, it has been around for some centuries already. The novelty lies in the technologies and the mindset that are giving it a new momentum, technologies and mindset that we will consider in this chronological record of the main events leading to what we now refer to as crowdfunding.
We should mention in passing both Jonathan Swift’s Irish Loan Fund, and Dr. Yunus’ project and Grameen Bank, as ancestors and pioneers of the microfinance phenomenon, each of which have histories of their own but which go beyond the scope of this blog’s subject. We will instead consider crowdfunding strictly in its connection with the web, and as a sequence of developments parallel to the growth of the social web.
Michael Sullivan is credited with coining the term crowdfunding back in 2006 with the launch of fundavlog, a failed attempt at creating an incubator for videoblog-related projects and events including a simple funding functionality. This scheme was “based on reciprocity, transparency, shared interests and, above all, funding from the crowd,” but the term crowdfunding only really began to be used by the masses a few years later with the advent of the platformKickstarter.
Late ‘90s – 2000: Internet campaigning and Charity fundraising
If we accept the “web” and the “crowd” are two essential elements in defining crowdfunding as an activity, the very first examples could perhaps be observed in the late ‘90s, when some Internet campaign funded projects and charity fundraising platforms started to appear.
On the social web front, in the mid-1990s, SixDegrees.com and AOL Instant Messenger were launched, and people were starting to sign up for online profiles and to connect with their friends to share information or to just keep in touch. Web connectivity between people started to grow and go beyond the simple email exchange.
Creative artists- endowed with a loyal and now connected fan base- started asking their “crowds” to fund new music, albums or a tour. For example, the British rock group Marillion, who gathered $60,000 in 1997 to finance their US tour using an Internet campaign, the “Tour Fund.” In 2006, SellaBand emulated this model, “where fans invest in music” building a specific platform where everyone could start raising funds to record an album.
Similarly, charity fundraising began to see the potential of the web and crowds when in 2000,JustGiving was founded as a charity fundraising site for challenge fundraising. Over 11 years, some 12,000 UK-registered charities have benefitted, raising more than £700 million in all.
However, whilst these examples tapped into the web, passion and the innate generosity of human beings, what was still missing was the right technical “social” infrastructure tools, and- most importantly- the mindset that underpins their use.
Mid 2000: Kiva, Microlending platforms, and Peer-to-peer (P2P) Lending
In 2005, Kiva was launched, the first platform to allow entrepreneurs to lend money to developing areas across the world. KIVA is now one of the most successful micro-lending platforms, having raised over $165 million through crowdfunding, and with an outstanding 98.83% repayment rate.
What makes Kiva “social” are some of the typical features you would have in a social network, like pictures, profile, updates; but more than that, it’s that sense of personalisation that originates from knowing what you’re doing with the money you’re giving.
This model was developed and expanded into what is known as peer-to-peer lending, an alternative to traditional bank lending, and it grew to accommodate the process of lending money outside of exclusively developing countries. One of the first peer-to-peer lending site to launch was Zopa, a London-based company providing an online money exchange service. Zopa operates within the UK, Italy and a service is being developed for Japan. In 2006, Prosper was launched in the US, following the same model. In 2007, LendingClub launched the second peer-to-peer lending site. Like KIVA, individuals submit requests for funding, which include a story, a picture and their credit risk. However these platforms were not particularly successful in the beginning, possibly because of overly tight regulations, and maybe because society was not quite ready, yet.
But social networks in those years were quickly becoming more and more similar to operating system. It was not more only about becoming friend with someone or live-chatting. Social networks were becoming platforms able to support a broad range of social applications and interactive functionalities. However, identities and experiences were still essentially disconnected between them.
2008-2009: The years of consolidation
In 2008, IndieGoGo was co-founded by Danae Ringelmann and Slava Rubin to “democratise fundraising” and “to empower creative entrepreneurs with Do-It-With-Others (DIWO) tools.” In 2009, US-limitedKickstarter initiated as a “new way to fund creativity.” These platforms are today two of the most popular crowdfunding platforms in the world. The working principle is the same: a large group of people can pool their money to help fund an idea. The real novelty that they brought in was that when one contributes to these projects, they should not expect to get money back. Depending on the level of pledges, the applicant can get rewards but no money.
Also the P2P model initiated by Prosper and LendingClub started a new life in those years. More and more lenders and borrowers were starting to connect directly via the Internet and avoid the banks. As SMW global curator Don Tapscott describes them: “What these P2P networks do that banks can’t (or won’t) is let people align their investments with individuals or causes that they believe in.” The two platforms registered with the SEC in 2009 and 2008, respectively.
Both the appearance of Kickstarter and IndieGoGo and the “new life” of Prosper and LendingClub are a sign that the technical infrastructure and the social mindset were now there, and ready to give crowdfunding its momentum. The changes in expectations and the personalisation of funding and finance are products of that new mindset that we’re cultivating thanks to – to keep it short – our continuous and rich interaction on social networks.
At the same time innovations like Facebook Connect and OpenID started to allow individuals to integrate their social connections as part of their online experience, blurring the lines between networks and traditional sites. Every experience could now be social, a crucial step for crowdfunding and its dependance on a strong potential for “virality”. The networks grow at the rhythm of community advocacy.
2010-2011 Equity based crowdfunding: GrowVC and CrowdCube
The creators of a Kickstarter project tapped into these elements to successfully crowdfund theirTikTok+LunaTik Multi-Touch Watch Kits. In less than one month, between November and December 2010, 13,512 “backers” pledged $942,578 of their $15,000 goal, setting the world record for the largest amount of money raised using crowdfunding.
This year, at the beginning of October, a woman named Rachel Perrie became the millionth person to back a Kickstarter project when she pledged to a film project.
In the past couple of years, as Kickstarter and Indiegogo have continued to grow quickly, we’ve seen an extraordinary profusion of new reward-based crowdfunding platforms seemingly appearing every day. Many are niche-targeted or limited to a specific geographical area or community or differentiated in some way.
However, there was still room for a new exciting development. In 2010, GrowVC launched, starting what is known as equity-based crowdfunding. GrowVC, which defines itself as “a new community funding model,” wanted to be the new KIVA for technology startups and help startups companies secure initial funding of up to $1M. It has grown to over 9000 entrepreneurs, investors and experts from 200 different countries.
It was followed in 2011, by Crowdcube, the world’s first business finance crowdfunding platform for businesses to raise equity finance. Last month, on the 22nd of November, the Rushmore Group secured £1 million investment from 143 investors to fund the development of a new venture in London. The investment was raised on Crowdcube in only 4 weeks and set a new crowdfunding record.
Both these platforms inaugurated a model that cannot currently be exploited in the US because of legal restrictions. But also these may be about to change. On the 3rd of November 2011, the US House of Representatives passed the crowdfunding bill H.R. 2930 (known as the “Entrepreneur Access to Capital Act”) that could allow startups to offer and sell securities via crowdfunding sites and social networks.
As outlined above and as already mentioned in the last post, crowdfunding has strong connections with the reach, empowerment and engagement of social media. The rapid evolution of social media is giving free rein to our social nature without the limits of any borders. For some time ‘Crowds’ have been forming affinities around interests and missions, creating new products and services, feeding innovation and, to use Wired journalist Jeff Howe’s words, they’ve been “using the Internet to exploit the spare processing power of millions of human brains.” One of the results has been a new mindset built on trust and participation, ready to embrace diversity, capable of reinventing itself, and empowered to change the world. Our need to support and get involved in projects we care about is deep rooted in our humanity as much as our tendency to improve things and innovate in order to live better. Crowdfunding can be seen as a natural response to fill the gap left in capital formation and funding models in the modern society.