The 4 basics of crowdfunding – Blog#1

This is the first blog of the new blog series: all you need to know about crowdfunding. Crowdfunding is an online funding tool that emerged in 2006 here in Amsterdam. In this blog I explain the four key concepts of crowdfunding: the initiator, the platform, the project and the donors. This blog will provide you with the basics to understand the following five blogs. Enjoy.

Hé! Each month I will upload a new blog series. Each series will have one central subject; the subject of this month is ‘All you need to know about crowdfunding’. A series consists out of several separate blogs. This is the first blog of the ‘All you need to know about crowdfunding’ series. 

Crowdfunding is an online donation method where those in need of money place turn towards the internet to promote their ideas and collect money. Anyone with a good idea (that is the initiator) can start a crowdfunding project, but not always successfully. In addition, anyone (the donors) can contribute to a crowdfunding project; small donations (around 20 euro’s) are common with crowdfunding.

Schematic representation of the main components of crowdfunding.
Schematic representation of the main components of crowdfunding. The main components of crowdfunding are the initiator (the one with the great idea and ambition to assemble funding), the crowd (the donors), the donations and the platform (the site where the crowdfunding projects are hosted). For more information about crowdfunding you can watch my Vlog: https://www.youtube.com/watch?v=iSFc2kfYKS0&t=1s
  1. The initiator: the solicitor 

Anyone with a good idea could start a crowdfunding project. This means that you don’t have to be connected to a company or group in order to ‘make it happen’. However, crowdfunding can also be used by companies: crowdfunding is for everyone. The individual (or group) that assembles the money is called the initiator (or the creator). While everyone could start a crowdfunding project, not all will succeed. The first step consists out of pitching your idea to the owners of the crowdfunding platform, they will decide if your project is good enough to be placed online. In other words, there is some form of selection.

While the main goal of a crowdfunding project is to assemble money, initiators are motivated by more than raising funds. Gerber et al. (2012) describe that next to raising funds, initiators are also motivated by establishing relationships. This means that with crowdfunding it is about more than just money, it can help an individual engage with funders and connect with them and develop a long term interaction that goes beyond the financial transaction. A third motive mentioned is that initiators are attracted to crowdfunding because it provides them with a sense of validation: crowdfunding can help initiators to feel more capable and secure about their abilities. This makes sense if you consider that through a crowdfunding project you ask (unknown) individuals if they like your project and want to support it. If your project is funded, this means that they do: if the project receives donations individuals are clearly interested in your ideas.

  1. The platform: the place to be

When I speak of ‘the platform’ I mean the internet site which hosts the projects. The platform is often run a group of individuals, who also decide which project is good enough to launch online.

alIn terms of the platforms, there are two broad funding models: (1) all-or-nothing or (2) all and more. The two fundraising systems determine when the initiator is allowed to keep the money. With the all-or-nothing model the initiator needs to assemble a before defined percentage of the target amount. For instance, at Voordekunst and Kickstarter an initiator needs to assemble at least 80% of the target amount in order to receive the money. If this threshold is not reached, the donations are recovered and the initiator receives nothing at all (in other words the project fails to assemble enough money).

Rockethub is an example of an ‘all and more’ funding model. An initiator can keep the money they assembled within the predefined number of days, even if this is a low percentage of the target amount.

3.The project: what it’s all about

A key characteristic of a crowdfunding project is that it runs for a before defined number of days (mostly between 30 and 60 days). The projects range from art projects to developing a medicine. An initiator has to provide an elaborate description of the projects aim: what will be produced or who will be helped and how will this be achieved, who will be connected to the project and what is the time span. The target amount is defined, as are several rewards.

4.The donors: the crowd

Anyone, with a computer or some other digital device, can contribute to a crowdfunding project. In the beginning of the campaign the crowdfunding project is mostly supported by family and friends of the initiator (that is strong ties) who donate because they have a crpwdclose connection with the initiator (Borst et al., 2018) and not because they want to make a difference or support a high quality project. Eventually the group of innovative  enthusiasts and the initiators’ network is exhausted and a different type of donors has to come in. The crowdfunding literature describes that at this point, in the middle of the campaign, the number of donations per day decreases (Kuppuswamy & Bayus, 2015).

This blog kept it pretty basic, but these basics are essential to understand the other blogs. Next week we start answering the main question of this blog series: is crowdfunding a logical next step for the philanthropic sector. Is it a replacement or an addition? Is crowdfunding in line with the next generation of givers? In order to answer this question I will present the 10 key characteristics of crowdfunding in the following blogs. 

Sources not in text: Kuppuswamy, V., & Bayus, B. L. (2015). Crowdfunding creative ideas: The dynamics of project backers in Kickstarter.

 

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