July 10, 2011
Have you heard of the urban myth about a computer programmer who wrote a bank program that made a deposit of once cent into his account ever time the institution conducted a transaction? The scheme netted him millions, But, like all crooks, he got caught and went to jail. Although the story may be bogus, the concept accumulating small amounts that eventually grow to huge amounts is worthy of deeper examination. This concept of accumulating a great deal of money from scores of separate sources is exactly what is involved when conducting crowd funding efforts.
Crowd Funding is Not New
Although crowd funding may be a growing trend online these days, the concept is not new. Politicians have been using t since time out of mind seeking contributions from thousands of supporters. Charities have been using this concept for some time as well. In fact, many appeal to a mass amount of supporters soliciting small donations. The concept includes the idea that small donations are less painful. But, to achieve fundraising goals the appeal must be successful to a mass amount of contributors. The aspect that is new includes the use of social media networking. This makes crowd funding part social networking and part capital accumulation/fund raising. The additional interesting aspect is that this has become a trending business model for raising capital for commercial ventures – everything from start-up to expansion.
Micropayments Make up Core
The core element for any commercial crowd funding effort is dependence upon micropayments submitted by supporters, or contributors. In some circles, these people making “donations” are called “micro-investors.” These “contributors” invest small amounts in the production of a concept or product that eventually pays off if the monetary goal is reached. Often, that reward is in the form of some type of good or service that has value beyond their simple investment. Other efforts return a part of future sales in return for the initial investment. The concept relies upon appealing to the enthusiasm found in many contributors who emotionally seek to support the project financially as well. The concept is akin to the act of gambling since in many situations a person makes that small contribution with the hopes later on it will return a large reward. Since the micropayment, or contribution is small, the risk appears to be minimal in the event the investment never pans out as expected.
Three Factors Encourage Crowd Funding
The concept of crowd funding is not new. It now appears more frequently on the Internet and is socially acceptable as a mainstream method for raising capital. The model appeals to many businesses due to three main reasons:
1. The World Wide Web has become globally acceptable as the primary method connecting one entity to another or people to people. It has become the perfect medium for today’s selected method for communication. Trust in use of the Internet has compelled more services and businesses to move online – some have chosen online as their only commercial presence. The trusting convenience provided through tried and true secure online transactions now convinces people credit card use online is fundamentally safe.
2. Global recession since 2008 now makes many investors quite wary and extremely cautious toward participating in new investments. Although this may seem to contradict factor number one, what the recession has influenced is the need to attract a mass amount of investors making smaller, and less riskier, contributions toward raising commercial capital. People who do participate in the investment world have turned toward greater diversification across many more channels making smaller contributions.
3. Internet reach. Although entities such as public television stations have used crowd funding efforts for some time, their targeted markets have to be tied to viewing the TV when the station makes a “donation” appeal. Crowd funding efforts used by businesses marketed through an Internet presence potentially have an unlimited audience through which capital can be raised. Additionally, it can be used by any industry. There typically exists a community online for almost any subject matter. Many online entrepreneurs actually enlist product inventors and designers who, for a small contribution, can pool resources to market their ideas. These are then presented to the vast Internet audience participating in product assessments and critiques becoming potential customers – and additional “investors” – for products and services that seem to be popular with a mass Internet audience.
Although crowd funding might be in its Internet infancy, the proven use of social media as a marketing channel makes the potential success for this unique capital raising effort appealing to many businesses seeking funds for start-up and expansion.
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