Social crowdfunding is Internet-based mass fundraising for projects, usually of an artistic or charitable nature. Websites like Kickstarter and Indiegogo take much of the hassle out raising money through social crowdfunding. You describe your project on the site and wait for money to come pouring in. Sometimes it works, but often it doesn't. Occasionally, a crowdfunding whim hits the jackpot.
Crowdfunding in the U.S. got its start in 2003 through the website ArtistShare.com. In its original concept, it allowed fans to contribute to projects sponsored by creative artists. The model was simple: the sponsor describes the project on the crowdfunding website -- usually with a video -- sets a fundraising goal, invites contributions and offers token thank-you gifts such as a T-shirt or a copy of a CD album. Some crowdfunding websites require that sponsors achieve 100 percent of their goal before releasing any of the contributions, which are returned if the fundraising effort fails. Websites take various fees for their services. For example, Kickstarter collects 5 percent from successful projects.
The 2014 crowdfunding effort by an Ohio resident, Zach Brown, offers an object lesson in effortless fundraising. Brown posted as his Kickstarter project a $10 goal to help him make potato salad for the first time. The appeal went viral in the social media and eventually raised more than $55,000 from about 7,000 people. Brown promised to throw a potato salad party when he reached the $3,000 mark, but the explosive success of his "little Internet joke" prompted Brown to pledge a "significant portion" to charity.
A Dose of Reality
Most potential crowdfunders must expend more effort than did Brown and are far less likely to succeed. As of January 2014, Kickstarter reported a project success rate of about 44 percent, whereas Indiegogo's success rate in 2013 was estimated at 34 percent for projects that received more than $500. Moreover, Indiegogo's success rate fell to less than 10 percent when all projects were considered. According to the Canada Media Fund, the keys to a successful crowdfunding campaign include momentum -- how quickly the project raises significant amounts of contributions -- and exposure on social media, such as that received by Brown.
The JOBS Act of 2012 enabled a new form of crowdfunding for small businesses. The idea, an outgrowth of the social crowdfunding phenomenon, is to give small companies easier access to investors without costly private transactions or initial public offerings. Investors receive stocks or bonds rather than T-shirts. Business crowdfunding, when it eventually launches, will not be as easy as is social crowdfunding. The U.S. Securities and Exchange Commission as of this article's publication had not yet released the final rules, which were expected to force fundraisers to disclose a significant amount of financial data. In addition, crowdfunding sites must check the legitimacy of equity crowdfunding appeals, and the amount invested by any one individual is subject to income-based caps. A company can raise no more than $1 million a year through business crowdfunding, whereas no such limit exists for social crowdfunding.
- Photo Credit Klaus Tiedge/Blend Images/Getty Images
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