Is it really practical to fund a
business from hundreds of small donations harvested over the internet? Simon
Brew investigates
There’s a sporting chance that you’ve seen
the work of Jane Espenson on your television over the past decade or so. She’s
written scripts for shows such as Buffy the Vampire Slayer, Torchwood and
Battlestar Galactica. Naturally, therefore, she’s worked with and
befriended some people with very deep pockets.
Yet, when it came to raising funds for one
of her most recent projects - a small web-based sitcom by the name of Husbands
(http://husbandstheseries.com) -
she chose not to turn to her well-heeled contacts. For Espenson is one of a
growing number of people who has turned to the idea of crowdfunding: seeking
small donations from many supporters over the internet, instead of big
contributions from venture capitalists, banks and such like.
Jane
Espenson's series Husbands has been largely funded by its audience
Consequently, the budget for Husbands' second
season has come almost directly from its audience. In all, 956 people have
donated a total of $60,000, with the smallest contribution being only $1.
Impressively, it raised its budget in less than a month.
Crowdfunding is a fascinating idea, and one
that’s beginning to find its feet, thanks to the rise of dedicated websites
such as Kickstarter (www.kickstarter.com).
Could it really give the banks - with their continued reluctance to lend to
small businesses - some serious competition?
Who needs crowdfunding?
Let’s be honest from the outset: for the
majority of businesses, crowdfunding simply won’t work. Since it requires the
interest of a comparatively large number of people to fund a venture, the
project itself has to have relatively wide appeal. After all, there’s something
idyllic and romantic about being able to fund a film, but an educational hobby
robot? That had 31% of its target when we visited its appeal page, with only 18
days left to go. Setting up a crowdfunding appeal is clearly no guarantee of
success.
“You need to do your homework,” Jane
Espenson told PC Pro. “Look at other projects, both successful and
unsuccessful, and figure out what would make you back something. Work on
the campaign video and the wording of your appeal. Find great incentives for
donors and include incentives across the spectrum, from low to high amounts.
And publicise the campaign.”
Espenson only turned to the crowdfunding
model for the second season of Husbands, “so we had all of season one to
use as a demonstration of what people were funding”. And if you don’t have a
back catalogue of work at hand? “Find another way to demonstrate what makes
your project special,” she advises.
Many have. In the past year, there’s been a
substantial rise in the number of crowdfunded projects. These range from small
video games costing a few hundred dollars, through to a documentary about US
footballer Jay DeMerit, which has banked $223,422. Seemingly out of nowhere -
although the roots of this variant of crowdfunding go back a decade in the
music industry, at least - a viable, previously relatively untapped source of
project funding has appeared.
However, Doug Andrews, the CFO of the
Homeworking & Small Business Alliance (HSBA) wonders if the novelty factor
is what’s attracting investors. “Crowdfunding sounds like something that could
work brilliantly for early pioneers, but I suspect that once it becomes
mainstream, it will be very difficult to get your idea found among all the
other businesses vying for attention. A lot of the excitement and goodwill
that’s associated with early trends will have been replaced with people asking
‘what am I going to get out of this?”’. Andrews admits that such questioning is
“not necessarily a bad thing in itself”, but adds that “as a business owner, I
wouldn’t want 2,000 investors dipping their oar in and trying to run my
business”.
Investor influence
Do investors really get much say? The
emerging crowdfunding model, through websites such as Kickstarter, Sponsume (www.sponsume.com), Indiegogo (www.indiegogo.com) and their ilk, encourage
project initiators to offer rewards for differing levels of donation, but they
tend to be gift-based rather than offering input into the business or a
guaranteed return. Some of the rewards are enticing - a part in a film, special
versions of the product being funded, the chance to get involved - but they
tend to be a substitute for a firm, legally binding share of the profits that a
substantive investment would normally attract.
Website:
www.sponsume.com
“It’s more like a charity investment,” says
Toby Ricketts, CEO of Margetts Fund Management. “People are investing on trust,
or in excitement, in the same way you and I would buy a lottery ticket. There’s
pleasure at the point of investment”. There are, however, far more effective -
and tax-efficient - ways to invest in a business, Ricketts argues, adding that
he would “invest $30 in a project, but only if I got $30 of enjoyment out of
it”.
While the burgeoning popularity of
crowdfunding websites suggests that people like the idea of small, tangible
sponsorship of a project, it’s an uphill battle to convince potential investors
to part with their credit card details, especially in less glamourous
industries. A scan of the most popular crowdfunding websites confirms a skew
towards creative projects. At Kickstarter, 943 film and video projects were
trying to attract funding when we visited, compared to 90 in technology. More
tellingly, in May 2012, only 23 tech projects had hit their funding target. In
the film and video category, it was 345.
That isn’t to say tech projects can’t
attract funding. Tammy Erdel, for example, is using Kickstarter to finance
AIRbudz in-ear earphones (www.pcpro.co.uk/links/216cfl).
“I believe that Kickstarter is beginning to promote more products that don’t
necessarily fall into the creative works arena,” she told PC Pro. That
said, she adds that “it’s important that you have another means to promote your
product and direct people to Kickstarter”.
Theresa Burton, CEO and co-founder of
British crowdfunding service Buzzbnk, told us that 58% of projects listed on
her site receive full backing, although she adds that “we work hard to set
expectations about what does and doesn’t work in crowdfunding, and the amount
of effort required to actively fundraise”. Buzzbnk also offers the option for
investors to make a loan, possibly with an interest return.
It’s worth noting that if you have a less
prominent project that fails to meet its target, you haven’t actually lost
much. Bernie Thompson, of Plugable (http://plugable.com),
has successfully raised funding via Kickstarter in the past, and is currently
seeking investment for a $50 thin client computer for schools. He isn’t sure
he’ll get to his funding target this time - although “there’s often a big jump
in backers at the end”.
But he argues: “We’ll have invested a bunch
of time, but we won’t have risked a big investment in hardware inventory,
because we do that purchase only if the Kickstarter succeeds. We’ll have
learned something very valuable about the size or character of the market for
the product, with less risk.” And if he doesn’t hit his target? He’ll scale
down his project, and do it anyway.
