What Is Crowdfunding And Where Does It Comes From?
Crowdfunding is a financial disintermediation where the creators of an idea or business or social project ask for financing to anonymous people who want to collaborate by advancing small amounts of money for a later reward. Keep in mind that crowdfunding only facilitates funding, but not the process of creation or distribution of the product or services being financed.
Although crowdfunding brings as a novelty the fact of being done through the network, it is not a new formula. It already was there before the invention of the internet and it comes from sponsorship and promotion of projects by society. A representative example is the Statue of Liberty, a project funded by the crowd. Arguably it was an “offline” crowdfunding. It was a gift from the French people to Americans and it represents freedom.
Crowdfunding also represents that freedom, in the sense that it allows to stop depending on a number of institutions that so far detracted maneuverability to entrepreneurs when launching their own projects. It is part of a trend based on business between people, where intermediaries are eliminated.
In December 2006, there was hardly business angels investing in startups in Spain. Public institutions did not support innovative projects in new technologies or internet, as ENISA, CDTI, and others are doing it now; neither there were specialized investment funds in startups, although there were technological entrepreneurs’ projects.
We came from the internet bubble: From 2000 to 2005 almost no one dared to invest in the network. However, in 2005 there was a resurgence powered by the new trends coming from Silicon Valley and the beginning of social networking and e-commerce. At that time, there were entrepreneurs who wanted to do things, but there was no investors or banks or institutions that would support them. So entrepreneurs thought about putting money for projects through a “web 2.0 companies market”, which then hatched only as an idea.
It took until 2012 for the big boom of crowdfunding to occur and for it to be considered internationally as relevant and not just as a trend. 2.5 million euros were raised that year in cultural and charity projects across all Spanish crowdfunding platforms.
3 Trends And 3 Pillars Of Crowdfunding
Crowdfunding is based on 3 internet trends:
- Collaborative consumption (eg. house or car sharing, eliminating intermediaries).
- Peer to peer lending (loans between people).
The 3 main pillars of the current crowdfunding are:
It is the promoter of the idea or project for which funding is requested. It has to be someone who creates confidence, so anonymity is not recommended. It must be a person or group with identity on social networks.
- The project or idea.
To be an innovative project (to provide a different solution to the problem), new (with no existence in the market) and to generate value to the world (that it really was sued by someone other than the actual creator). It must be transmitted or told in video format and if possible, with a prototype.
- The return or reward.
It is profit. There must be a clear relationship between money requested and what it is offered in return. It is something that determines the market itself. For this reason, it is recommended to look at least 12 crowdfunding campaigns before designing your own, to see what rewards are being offered, what kind of, and how much money is requested. A reward can be a hug, a percentage of the company or the project itself to be launched, but it always has to be a return for the money requested. A campaign usually has several levels of reward, depending on the different quantities requested (for example, a reward for an amount of 5 euros, another one for 15 euros, another one for 25 euros, and so on) .
There is a fourth important component: Virality. The project should be disseminated on the Internet through social networks, with an important component of digital marketing.
Types Of Crowdfunding
According to the European Association of crowdfunding, there are four types of crowdfunding:
- Donations crowdfunding.
It was the first to appear. It covers requests for NGOs and non-profit associations. It is regulated by the same laws that govern the non-profit entities. It is subdivided into two:
- Donations crowdfunding for cause.
The reward is symbolic (a hug, for example). It does not correspond to the contributed money. Donations made in this mode are tax deductible.
- Donations crowdfunding for reward.
It is a pre-purchase.
- Donations crowdfunding for cause.
- Rewards crowdfunding.
It is the most famous: People give money in exchange for something (a reward). It is regulated by the laws of electronic commerce and data privacy. Money is requested in exchange for rewards to suit all budgets. It may be digital or tangible rewards. Customers, who demonstrate that the project makes sense in the market, are sought. A reward crowdfunding campaign helps to validate the project, to size it, to see how difficult reaching the target audience is. People who give money know that the product or service is a prototype and that it will be a while until they can have the actual product. Typically, these people give much feedback on the platform about how they want that product. It is subdivided into:
- Reward crowdfunding “everything or nothing”.
If the requested amount is not reached, no money is obtained. Therefore, it is recommended to ask for the minimum necessary to get the project underway.
- Reward crowdfunding “everything counts”.
Every euro that enters the campaign is delivered to the project creator. With this type of campaign there is a problem of confidence: If we have said that we need “X” quantity to put the project in place, we will have to demonstrate how we will put the project in place if we get less money. Therefore, it serves to modular projects that are very clear.
- Recurring reward crowdfunding.
Used to projects with continuity over time, as digital press.
- Reward crowdfunding “everything or nothing”.
- Loans Crowdfunding.
Of the 34 billion that crowdfunding moves worldwide, it is estimated that 22 are intended to crowdfunding loans. It is a bank disintermediation (loans among equals). Those who lend money receive higher returns than the bank would give and those who receive the money pay less interest than in the bank. It is subdivided into two types:
- Project loans crowdfunding.
It allows to invest in a particular project.
- Loan fund crowdfunding.
It allows to invest in a group of projects. It is far more transparent than a banking fund. It is possible to see who is paying the money.
- Project loans crowdfunding.
- Investment crowdfunding.
It encourages multiple investors to invest in a particular company. It is subdivided into:
- Investment in the company crowdfunding.
It is the only one, unlike the previous ones, in which a percentage of the company is transferred to the people offering the money. It works like traditional venture capital but digitized; it is more comfortable for investors. There are hundreds of investors who put less money.
- Crowdfunding investment per project.
A percentage of the company will not be given in, but a percentage of the profits in a given project of that company. The rewards for profit sharing in other countries are sweeping. A lot of people are more interested in the possibility of having a percentage of the benefits of an innovative project than in receiving the product or service itself.
- Investment in the company crowdfunding.
In 2015 the Law 5/2015, of April 27, which includes the last two types of crowdfunding (the first two were already regulated) is enacted. In crowdfunding for loans, all platforms are regulated by the Bank of Spain, and in the crowdfunding investment it is regulated by the CNMV (Comisión Nacional del Mercado de Valores) (National Stock Market Commission).
Crowdfunding Experiences: Interview With Rubén Gutiérrez, Project Manager At Ulule
To first hand see the experiences of people who have crowdfunding campaigned in the field of education and training in Spain, we have come to Ulule, one of the crowdfunding platforms specialized on creative, supportive and innovative projects. We asked Ruben Gutierrez, Project manager in the Spanish platform, and he told us about his career:
“We work with all kinds of projects. There are some cultural ones, such as publishing a book, other music-related ones; then there are others that are more social oriented, with NGOs and associations, etc. The only thing we do not work with are the personal projects, such as finance a trip or a mortgage. There are other platforms that do, but to us, those projects do not fit into our roadmap, at least by now”, Ruben says.
“We are working very well, because the success rate of the projects is around 72%, depending on the month (it fluctuates). The projects do not go ahead sometimes simply because the creator has not been able to spend time; the creators behind the project may be individual, may be trademarks, may be companies, associations… there are many profiles. For example, it can be an individual creator, an independent who is launching his new book and right at that moment a new order arises; then he/she really will not have time to devote it to launch. As all campaigns are always checked before being launched, they always tend to be extremely well prepared, so that they have the best chance to succeed.”
“A time ago, here in Barcelona, in March 2015, a project called Riborquestra came, which is composed of a 60 children, youth and adults orchestra. It is based on the musical and emotional education to strengthen the work of social, communicative and relational skills. His goal then was to professionalize the work of the team of 13 musicians, educators and managers and provide the project with resources. In addition, they planned their first concert at the Petit Palau de la Música at Mataro.”
They achieved 104% of requested (4,071 euros, when they asked for 3900).
Another successful educational project at Ulule highlighted by Ruben is the Órgiva Montessori Childrens’ House. This is a team of parents and teachers of various nationalities, who wanted to offer a Montessori education to children aged 3 to 6 years in the area of the Alpujarras, at the south of Granada in Spain. The first Margarita Órgiva Children House was established in 2013, with 9 children, in a log cabin installed in the garden of one of the founders. Then in 2014-2015 they moved to another space and increased the quota to 19 children. For the 2015-2016 school year, they wanted to change to a bigger place and renovate it for their children, and they needed funds for materials. They closed the season with 115% of the money requested (5553 euros of 4810 requested).
What To Do To Launch A Crowdfunding Campaign?
Ruben tells us all about it: “The procedure for submitting a project does not change, it is virtually the same regardless of the nature of the project. The first small step that must be taken when a person or team has an idea in their head, is to have a closed budget about what they will need and send the proposal through the web. It’s simple, it is enough to say: ‘We are such a person or group of people that want to do this and we thought that to get there, we will need as much money’.”
“With all that information, what we do is to filter out the proposals and analyze whether the proposal is feasible or not. If we see that at the moment it is not feasible, we contact with the creator and ask him/her if he/she believes that this is the right amount, if he/she has reviewed well, if he/she is really going to need it, to be aware of the limit of reach of the campaign (calculating a bit, it is easy to know if the campaign will be viable).”
“Almost all proposals usually go forward. It is a filter to have a first contact with the person; it also allows us to see what expectations the Creator has with the campaign. If a person tells you: ‘I want to raise one million euros’ and you really see that there is not such a potential behind the community that supports the project, the first thing to do is to comment and analyze the proposal.”
“Once you pass the first filter, you tell the person everything that will be needed to organize the campaign: What information is asked, what things need to be filled… There is always someone from the Ulule team to help them throughout the process. When the proposal is assigned to a person of our team, he/she accompanies them while preparing the project and even after completion. To raise any questions or queries, there is a chat tool, in addition to the phone, Skype or email.”
“When you have prepared the campaign, the final validation is given, so that everything gets to be all right: It is found that we have not left anything behind and the campaign is launched online. There must be a certain length and that is the period in which the campaign is active and people can get to give money.”
“The time it takes to cover the whole process depends on each person, but it is not much. Organizing a campaign does not have much mystery. For example, there are people who ride the whole campaign in an afternoon, and there are people who spend three months working on it. From our part, as we get the proposals, we seek validation to occur, so once this first filter is overcome, we get to work with it.”
“More important is the responsibility of the people who are behind the proposal; they need to have time to spend while it is online, but what is related to preparing the campaign itself will not take long. I think the most difficult thing you can find when organizing a campaign is the video record and the pictures you need to publish, which is usually what people find a little more complicated, but the rest of it is text and it is easy.”
“The time a campaign is online usually goes between 30 and 45 days (a month or a month and a half as much). So may be the total time to be working on the campaign is a month and three weeks. It also depends on the creators, if they have more time or less time to spend.”
“You can start a campaign as an individual, as an association, as a company… No problem. Just a different documentation is requested. On the website of the platformyou can see what information is requested each, because due to transparency issues and capital blocking issues we always have every move of money super clear, which is what we requested as a platform.”
What Determines The Success Of A Crowdfunding Campaign?
“Success depends a lot on the creators, because there are cultural projects for example, which is in the category where there are maybe more projects, which are very good and some that do not work. That depends almost more on the creators behind of the campaign than of the category itself. Sometimes there is a category in which it is more difficult to raise the campaign, but with help and a little time, it is possible to do something cool. It depends mainly on the people behind, the creators. If they are people who will be engaged 30 or 40 days during the campaign, the success rate will be 72%. Once everything is ready, that’s all right, we help him/her with all things that should be done, things not to do, etc; From there, the team will also take off a bit and if the creator puts the effort, it sure will go ahead.”
“More than categories, I always talk about compromise. Some people say, ‘Well, I follow the project and that’s it, and on the 30th I show up here to see what has been raised’, but things do not work that way. There is much work, you have to be 30 days answering questions that people have, taking charge of the project, etc.”
“During those 30 days, the person is especially requested to talk about the project. It does not matter the crowdfunding platform, the category or type of project you want to do: it always works the same way, they always have to follow the same small steps to reach 100% or even more. The first circle of people you have to send the idea would be very close to the creator, because it is people who already know the idea, which has heard about it from his/her friend, his/her family or whatever, and people who if involved, will help you not start with 0% collected, which is the most complicated of all.”
“If you communicate your idea for example in a magazine or on a blog and the campaign is very cool, but no one has put money on it, it gives 0 % raised, people will not be encouraged to participate, because it’s like when you go to a bar and is empty, people never want to go, you do not want to be the first at something. So, we always recommend that before going public, before starting to spread in networks, blog, etc., someone has to do the first contributions. What is the easiest way? For people who already know us, the closest people… This would be the first step and it should be taken the first day of campaign.”
“The second step would mainly talk about the project to the community of people of the creator. This is super important because in reality many project promoters are expecting a miracle and it does not work like that. Not because the platform has 3 million users, nor the project have 10 users, it will go better or worse. It always it depends on the creator, because in reality the platforms are not niches where people have the money in hand and is waiting for you to upload your idea. It does not work that way. It is extremely important to have a community before starting the project.”
“For example, in the case of music, I think it looks super clear: A band that wants to take his second album, which already has its own followers, have people listening to them, who knows his first album before being famous… those people are the ones that will really be interested in the campaign. As in music, it works the same on other topics. There must always be a community of people that already fancy the idea and that is practically waiting for the campaign.”
“If these two steps are done well, then yes you can reach people who do not know anything. These people who already knew you can recommend your project to his friends, to his contacts; when you reach a certain amount collected, then the campaign gains some credibility; people coming in without knowing anything, will think it is a serious campaign, they will see that you have raised money, that you deserve their trust, and they already have all the arguments to end up contributing. Therefore, this would be the process for any type of project and on any platform.”
“The number of people who make up the community of the creator depends a lot, for example, if you want to raise one million euros, because we are talking about a brutal amount of people; you have to reach many people. The goal you want to achieve, its viability, it will depend on the amount of people you can reach, the scope your project has, your community, etc. It should be looked up in each case.”
How Much Money Request Altogether? How Much For Each Reward?
“It is recommended to request the amount you need, because in reality, usually the media collected in the projects in one or all platforms is a figure that does not add much, because there are projects that have been EUR 500 and did not reach more, and there are projects that were of 500,000 euros and got even more. You always have to ask yourself how much it takes to build your project, because otherwise, it would not make sense.”
“If you do you need 10,000 euros and the average revenue of the platform is 2000 euros, this is not a reason why to set a goal of 2000 euros, because if you needed 10,000, with 2000 you will not be able to do practically nothing. You should always put the amount each creator needs to raise. Otherwise, it is absurd. If you need an amount of money it is because you get a budget, you have figured everything and that’s the figure you have to request.”
“The average contribution is 50 euros. This is shared virtually across the sector. It also depends on the project, and it depends on the rewards offered. If there are good rewards, you can probably get more money, and if there are a little less good rewards, then it will be more difficult to move forward and that people get to put money on that particular project.”
“In social projects, almost everything can be offered as rewards, although they tend to be a little more symbolic. It is a question of giving an idea back and see what you can offer. What works best are tangible rewards that people understand and they can receive at home. Obviously, it is not the same if a person puts five euros that if a person gives fifty. A person who has given fifty will receive much more than a person who has put five euros.”
“For example, in Riborquestra, the rewards were at 10 euros. The reward was more symbolic, and it consisted of an invitation to a band rehearsal. If a person put 20 euros, then he/she got a ticket for the opening concert that was to be done in the monumental theater. If people put 25, they would receive two tickets. If people put 40 euros, they could see the documentary that has been done to these children online, plus going to the concert, plus receiving a T-shirt… These are the kind of rewards that are usually given.”
How Many Crowdfunding Campaigns Can Be Launched?
When doing several campaigns, whether it is the same project, if the campaign is the same and you want to repeat, a few months should be left in between (five or six months). If there are different projects that will be carried out by the same association, you can leave a little less time, because in reality people addressed is a little bit different. It depends primarily on the resources that association has, because surely you will need someone who is focused in the campaign and that cooperates day by day.”
“For example, two campaigns at once is a very bad idea, because the campaigns require work that takes time and cannot overlap; it is very complicated. For an association that is beginning with the project, it is best to focus on a campaign and see how it works; then, if it is necessary to launch another one later, there is no problem.”
“By the fact that the idea fails, it does not mean that the idea is very bad or you do not serve to carry the project forward. There may have happen many more things. Normally, all projects launched at the campaign, which go public, these are always reviewed by us to have the best rewards, the best explanation, so these are best thought out before launching.”
“If a project fails, for example, maybe it was due to the complication, because the creator has not dedicated the time it was needed, because the creator did not understand very well how they should communicate it and these little steps that we mentioned for the idea to go ahead, things like that. It does not mean at all that the idea is bad, or maybe it was not the time or the idea needed to be more elaborated for people to understand it better. It is not the same an idea that is a sketch on a napkin that a prototype that people can see and understand. There are a thousand factors actually. You can look back at what has failed, what has not been understood, and re-launch the campaign, there is no problem.”