Bank said no? Join the club. Now there’s a new way to fund your idea: ask the crowd. Rachel Botsman reports.
For more than three and half years, John Halko ran Comfort, a hole-in-the-wall five-table restaurant in Hastings-on-Hudson, New York. He specialised in simple organic home cooking. Being pretty much the only restaurant of its kind, it became a popular dining spot with the locals. In spring 2008, Halko decided it was time to expand to a second location. As it happened, a perfect space opened up, an empty studio just up the street from Comfort’s original site. But he was halfway through renovations when the credit crisis hit. Halko’s initial source of funding – a home equity line – ran out, so he applied for a loan. Despite having an above-average credit history, and a successful restaurant he received a ‘no’, a ’no’ and a ‘no’ from different banks.
Halko realised that his best asset was his crowd of loyal customers, some of whom would eat at Comfort a couple of times a week. Understandably, he felt uncomfortable asking them directly for a flat-out loan but was sure they would invest in the new restaurant, if he made the process simple and worth their while. He came up with the idea of ‘Comfort Dollars’, VIP cards that customers could purchase and get a 20 percent rate of return, in food, on their investment. If you bought a card with US$500 Comfort Dollars, you would be entitled to US$600 worth of food when the new restaurant opened. Through small amounts of money, from lots of different customers, Halko quickly raised the additional US$25,000 he needed to complete the renovations.
Franny Armstrong is a British documentary maker with a relentless passion for films based on David vs Goliath real-world stories that remind us of the impact individuals can make. Armstrong has spent much of the past five years creating The Age of Stupid, a film set in 2055 that takes a part-fiction, part-documentary approach to portray the impacts of climate change. When Armstrong first started the project in 2004, she wanted it to be completely independent of special interest groups and free from the pressures of traditional big movie studios who may have wanted her to tone it down or to hurry up. So she decided to do an open call to the public, whereby anyone could invest in the film. Those who gave £20 were given credit on The Age of Stupid website; those who gave £5000 and up will get 0.05 percent of any profits. More than £450,000 was raised from over 620 individuals by the time the film was released at the end of 2009.
Comfort Dollars and The Age of Stupid show how people around the world are mobilising the power of community collaboration to get things done outside of big banks and the financing middlemen. As with John Halko’s restaurant, this collaboration may be relatively small and rely on an existing community to tap into for funding. Franny Armstrong sits at the other end of the spectrum along with other creative entrepreneurs who are using the internet to bring together groups of diverse and dispersed individuals with a shared passion or interest, to invest small amounts of cash to fund a common project. They are replicating a community funded model on a much larger and unconfined scale.
The idea behind Comfort Dollars and The Age of Stupid is known as crowdfunding, derived from another neologism: crowdsourcing. This concept was coined by writer Jeff Howe as the ‘act of taking a job traditionally performed by a designated agent (usually an employee) and outsourcing it to an undefined, generally large group of people in the form of an open call.’ Crowdsourcing, now a well-documented phenomenon, is applied to solve problems (eg Innocentive, an open innovation community that provides solutions to tough problems), create products (eg Threadless, a community-centred online t-shirt store) or to develop collective repositories of content (eg Wikipedia). Crowdfunding is the same idea; just applied to financing.
Not a new idea
The basic principle of raising money and pooling the contributions of lots of individuals is nothing new. Politicians, (notably President Obama, who, during his election 2008 campaign, raised US$650 million from small donations) and charities have being doing it for years, although not necessarily under this moniker. But the potential of crowdfunding goes beyond a healthy stream of campaign finance or a credit shot-in-the-arm. Crowdfunding can create a community from the outset that will support, invest in and champion something they love, whether it be a film, an idea or a small business, and continue to promote and share in its success along the way. It’s hardly surprising that it’s fast becoming a funding solution of choice for some entrepreneurs, musicians, filmmakers, designers, social innovators, small business owners and even explorers.
Diverse forms of crowdfunding are emerging around the world, particularly in sectors such as fashion, music and sports, where people may feel a sense of emotional attachment to a product or idea. For example, Catwalkgenius enables fashion fanatics to invest in emerging designers in return for perks and a share of the profits; sites such as Akamusic, ArtistShare and SellaBand let people invest anything from US$1 to US$15,000 in a new musician or band; IndieGoGo and Biracy raise money for up-and-coming filmmakers; and the infamous MyfootballClub, started by William Brooks, recruited more than 50,000 sports fanatics to invest US$35 each so they could collectively buy and manage Ebbsfleet United FC in the UK.
Not all crowdfunding sites necessarily focus on one interest or type of product. A new breed of collaborative funding marketplaces is emerging (predominantly in the US) based on a microfinance-meets-venture-capital model, such as Mobincentive, ProFounder, FirstGiving, PledgeBank and Kickstarter, that enable everyone from artists to inventors, athletes to explorers to tap into capital from their communities to fund a wide variety of projects. One hundred and forty-eight backers collectively pledged US$8142 to fund Emily Richmond’s ‘Let’s Sail Around the World’ Project, to research and promote initiatives in sustainability; 62 backers pledged US$5518 to produce 500 editions of The Wonder City, a graphic novel by Courtney Zell and Justin Rivers that re-imagines New York’s history.
Outside of being a collaborative way to fund ideas and fuel creativity, crowdfunding is an inherently powerful and democratic platform to enable the public to influence niche projects. For example, Spot.us, an organisation that enables community funded reporting, was the subject of a recent piece published in The New York Times, ‘Afloat in the Ocean, Expanding Islands of Trash’ about the Great Pacific Garbage Patch, a swirling mass of trash soup. Lindsay Howshaw, a freelance environmental journalist, would not have been able write the piece were it not for the 100 plus donations, amounting to $10,000, that paid for her work on the story.
Similarly, there are the likes of first-time inventors such a Gretha Oost, a Dutch designer living in Melbourne, who needed a lump sum of upfront investment to bring her invention to fruition. Oost has invented a slick reusable water bottle that filters tap water on-the-go. Recognising that it would be difficult and time consuming to get the financing she needed to prototype, test and launch her product, Oost asked the Australian public to pay $32.10 to pre-order one of the 10,000 units she needs to bring her product, 321 (named for the 3 litres of water it takes to make 1 litre of bottled water) to market by March 2010.
What’s the incentive?
For the giver, it often has little do with expectations of financial rewards, but is about experiencing the camaraderie of being a part of something with a shared purpose that you believe in. It can just be the chance to meaningfully and conveniently interact with a creative or topical endeavour.
In all different parts of our lives, the collective power of physically dispersed yet virtually connected individuals is becoming apparent. As people move from hyper-individualistic consumer behaviours to a group mindset of getting things done, an empowering dynamic emerges. Crowdfunding, whether it be via local communities or online networks, is bringing people together, making them more willing to leverage the old rule of thumb: there is power in numbers. In this sense, the appeal is more about the ‘crowd’ than the ‘funding’.
Supporters may be rewarded with financial returns, but creators and founders often inspire people to contribute by offering both tangible perks (t-shirts, experiential exclusives or first editions for example) and intangible benefits such as credit or updates on the project from the founder as the idea takes shape.
When 23-year-old singer/songwriter Allison Weiss launched her project on Kickstarter, she reached her goal of $2000 in just 10 hours. She thought it would take 60 days. More than 205 backers pledged $7711 for Weiss to make and press 1000 copies of her latest song in eco-friendly digi-packs. A couple of days after Allison met her goal, she posted a project update on the Kickstarter website titled ‘Phone Call with The One who hit the mark.’ It is an honest and charming Skype video chat with Jacquie, a young woman in Australia who made the pledge that pushed Allison over her $2000 target. They marvel over time zones and issues of hemisphere, and Jacquie worries that, as a new Allison Weiss fan, she’s not as deserving of the thank you call as some of Allison’s bigger fans.
Weiss is not signed to a record label, she doesn’t have a manager but has a large online fan following. People pledged because she has real talent but her ‘rewards’ were also unique and highly personal. For her backers she did a ‘celebratory marathon live stream’ where she played every song she’d ever written. It took four hours. As Weiss commented ‘it was like a huge party on the internet for me and all my backers.’ The role of rewards on crowdfunding sites such as Kickstarter is to create the feeling of a backstage pass to a special community that you want to join. Yancey Strickler one of the co-founders of Kickstarter explained to me, ‘The actual creative project itself is secondary to experience or warm glow you get from contributing. Plus, the intimate access to an artist in their early stages is like being able to say that you were at the Cavern Club when the Beatles first played.’
The primary benefit for the receivers is obvious; interest-free money to make their creative ideas a reality or to get paid for their talents. But they also talk about an unexpected bonus: when people are effectively turned into community ‘shareholders’ they become not just financially but emotionally vested in the project. Whether it is a restaurant like Comfort, a film like The Age of Stupid, a novel such as The Wonder City, or a water bottle like 321, these early funders are a fan base motivated to promote to their own network, build momentum and word-of-mouth. In other words, crowdfunding creates a critical mass of participants, customers or fans.
It creates a crowd.
For me, it matters what the crowd is gathering for. There are relatively few limits to the number and type of independent social enterprises and creative ventures this model can help get off the ground. In the same way, the internet has created infinite opportunities to matchmake sellers and buyers, we now have the platforms to efficiently match people with money to give, with projects that are of interest and need funding. This creates a vibrant marketplace of realised creativity, ambition and innovation generated by the idea of banking on community.
RACHEL BOTSMAN writes, consults and speaks on the collective power of community. She will be talking at TEDX Sydney at CarriageWorks on 22 May, 2010.
