Why Are Most Following the Crowd...funding

I’ve contributed to a number of crowdfunding campaigns in the past. I once donated $20 to help my film making friend from Ryerson to host a screening of his film. I also bought a pretty ridiculous shirt (see photo) from James Franco for my friend and I because we had a not-so-secret obsession with the actor and it seemed like the perfect item to symbolize that “love”.  But let's not dwell on my overwhelmingly impressive fashion sense, let's talk crowdfunding. What recently came as a huge shock to me, is the accelerated growth this industry is experiencing. The global crowdfunding market was predicted to reach $34.4B in 2015, which more than doubles the 16.2B raised in 2014.

Quickly, What is Crowdfunding: A quick re-cap for those of you unfamiliar with the topic, crowdfunding allows businesses to raise funds for their projects and/or products by collecting monetary contributions from a large group of people. Today, this form of fund raising is usually done online.

In a recent lecture at Schulich School of Business I learned that crowdfunding now equals the amount of money raised by venture capital firms for new projects and products. I found this statistic to be crazy, but from my research there is a clear reason for this growth. Popular crowdfunding sites such as Kickstarter, Indiegogo and GoFund Me, to name a few, not only provide businesses and individuals with new ways to raise investor capital but due to the evolution of crowdfunding, the benefits of these services go well beyond simply raising funds. These crowdfunding platforms offer a variety of attractive aspects of their services that were not necessarily seen before when trying to secure funding for a product or project. 

Increased Brand Awareness
Crowdfunding has the ability to raise awareness and generate publicity for a product. Companies are using their crowdfunding campaigns as tools to generate buzz about their new offerings. A successful crowdfunding campaign can enter into the “viral” territory, allowing the campaign to raise even more funds than expected (a great example is the ALS ice bucket challenge). Crowdfunding also helps to tell the story of a brand, allowing for individuals to connect with the background of the individuals creating the product, helping to establish and create an emotional connection between the customer and product.

Improved Market Research
Crowdfunding helps to establish product validation, and sometimes to destroy it, through customers reactions regarding what they like or dislike about the product. Businesses are able to receive instant feedback from likely customers before their product is finalized. The days of consumers passively watching advertisements is starting to fade, crowdfunding encourages engagement and activity between business and its customers.

Increased Speed
For many small businesses, the option of crowdfunding is much more attractive than traditional funding from banks, which may still be reluctant to lend money due to the lingering effects of the financial crisis. In the past, small businesses could wait several weeks for a funding decision from a bank and now they can be approved for crowdfunding campaigns within days, and sometimes approval isn’t even required. Giving business owners instant ability to start raising funds.

What’s Next?
As the impact of crowdfunding changes so do the industry regulations. For example, businesses can now raise investor capital in exchange for equity in the company, where as in the past, this was not allowed in Canada. Because of these changes, many new rules will be set in place to help protect investors. Experts say more than half of startups ventures fail, which is partly why regulators are putting restrictions on the equity crowdfunding sector as a way to protect investors. 

I wonder, with crowdfunding providing so many additional benefits, will it ever replace the conventional ways businesses would raise capital through venture capitalists and investment firms? Will the popularity of crowdfunding force these traditional investment firms to increase their offerings in order to compete? 

Crowding funding is disrupting the venture capital industry, literally one dollar at a time.