Abstract
This note examines crowdfunding, its background, key milestones, major platforms, and types of funding models. From the emergence of the earliest examples of crowdfunding in past centuries to the rise and evolution of online platforms in the digital age, this note demonstrates how crowdfunding has become a powerful tool for realizing innovative ideas. Additionally, by introducing various funding models and different user experiences, it emphasizes the importance of understanding the existing differences and selecting the appropriate platform for successful fundraising.
Introduction
Crowdfunding, as a novel method of attracting capital, has brought about a significant transformation in financial markets. This approach, which utilizes the pooling of small financial resources to support diverse projects, has created new opportunities not only for entrepreneurs and artists but also for innovators worldwide. By leveraging the power of digital technology and social networks, crowdfunding has paved a new path for the growth and development of ideas, reshaping the traditional landscape of financing.
First Section: History and Evolution of Crowdfunding
Crowdfunding, also known as group investment, is recognized as an innovative method in financial markets for raising capital. This distinctive type of financial sourcing has a history estimated to be less than three decades. Although its current form, as we know it today, does not date back further than the emergence and popularity of platforms and social networks, the traces of its early examples can be identified in centuries past. Since its inception, crowdfunding has embarked on a tumultuous journey, transforming from a novel concept of fundraising into an industry that plays a significant role in the direction and advancement of innovative ideas.
The aggregation of small financial resources, or crowdfunding, from its earliest days as a specific financial model, has become a powerful tool for entrepreneurs, artists, and innovators, altering traditional financial perspectives. As it continues to adapt to changing economic landscapes, its evolution remains an amazing exploration resulting from the synergy of the “crowd” and “communication in the digital age.” In its initial stages, this approach to financing had its roots in grassroots initiatives, but it has now become entrenched in platforms, their member communities, and campaigns. This document aims to explore the background, key milestones, platforms for capital raising, and various types of crowdfunding.
With a brief look at the journey traveled, we examine projects that were funded through capital aggregation before the term “crowdfunding” became popular, yet their mechanisms align with this type of financing. Many historians consider the investments by ordinary citizens in the risky maritime ventures of the 13th century, aimed at gaining higher profits, as one of the earliest instances of relying on the crowd to secure funding. Additionally, efforts to finance the publication of authors’ works through offering subscriptions to enthusiasts or raising the funds needed for wars through the sale of war bonds are other examples of this type of capital aggregation in the history of financial activities.
One of the most iconic events and indeed a milestone in the history of crowdfunding is the project to build and ship the Statue of Liberty. The financial resources needed for constructing and sending this statue were supplied by the people of France through a creative solidarity campaign. The cost of building and shipping the Statue of Liberty in 1880 was estimated at nearly $250,000. As a comparative value, this amount is roughly equivalent to over $5 million today. To help raise the funds, the sculptor of the Statue of Liberty, Auguste Bartholdi, produced 6-inch and 12-inch statues of “Lady Liberty” and inscribed the names of contributors on the base, creating some of the first crowdfunding rewards. The 6-inch statue was sold to contributors for $1, while the 12-inch statue was sold for $5.
In the 18th century, in a more organized move, Jonathan Swift also established the Irish Loan Fund, which provided loans to low-income families. The funds needed for these loans often came from large groups of wealthy individuals who saw it as a way to collectively support the poor. As mentioned earlier, the method of crowdfunding has roots that go back in history, but the term “crowdfunding” itself is a more recent coinage. The first recorded use of this word on the internet was on August 12, 2006. American writer Michael Sullivan needed a term to describe collective contributions from the public, so he chose the most accurate description possible, and the word crowdfunding was born.
Section Two: Crowdfunding Platforms and Their Models
Today, digital devices and the internet are an integral part of our lives. This has created a fertile ground for the growth and development of crowdfunding platforms. These platforms have become indispensable players in the modern landscape of fundraising, offering diverse opportunities for both fundraisers and investors.
The first successful example of crowdfunding in its modern form occurred in 1997 when a British rock band funded their tour expenses through online donations from their fans. Inspired by this method, the platform ArtistShare was launched in 2000, becoming the first dedicated crowdfunding platform. Following this, numerous regional and transregional platforms emerged, each with diverse objectives, missions, and collaborative models. Crowdfunding platforms can be briefly classified based on the following criteria:
Crowdfunding Models and Methods of Benefit
One of the main distinctions in the employed crowdfunding models lies in their approach. Some of the most fundamental models include reward-based, equity-based, and donation-based models. Platforms like Kickstarter and Indiegogo primarily follow the reward-based model, allowing backers to receive non-financial incentives in exchange for their support. On the other hand, equity-based platforms like SeedInvest and Crowdcube offer their supporters a share in the project or company. Donation-based platforms like GoFundMe focus on charitable contributions without any expectation of financial return.
User Experience
User experience is another important aspect for comparison. Kickstarter, known for its creative projects, uses an “all-or-nothing” funding model, which means that projects must reach their predetermined funding target to receive any funds; otherwise, the collected funds will not be allocated to them. In contrast, Indiegogo offers both fixed and flexible funding options, providing entrepreneurs and innovators with more flexibility.
Geographic Reach and Investor Diversity
Geographic access is also a distinguishing factor. Kickstarter and Indiegogo, as global platforms, attract a wide range of projects and investors. Region-specific platforms like Crowdcube (UK) and Campfire (Japan) cater to local markets, fostering a sense of community support and empathy.
Regulations and Regulatory Frameworks
Regulations and regulatory frameworks vary across different platforms and regions, influencing the types of permissible projects and the level of investor protection. Crowdfunding platforms, due to financial risks, often face stricter regulations. The evolution of technology plays a crucial role in shaping the dynamics of crowdfunding. The emergence of blockchain-based crowdfunding platforms introduces decentralized finance (DeFi) elements, enhancing transparency and reducing intermediary involvement. In contrast, regional platforms operate under the oversight of local authorities and national governments. For example, Iranian platforms obtain their licenses from the Iranian Securities and Exchange Organization and are supervised by this body.
Conclusion
Crowdfunding, with its continuous advancements and evolution, has proven that it is not merely a passing trend but a permanent and influential component of the global financing ecosystem. By offering countless opportunities for entrepreneurs and investors, crowdfunding facilitates access to financial resources and accelerates the growth of innovative ideas. However, success in this field requires a thorough understanding of regulatory frameworks and rules, the correct selection of platforms, and the implementation of effective fundraising strategies. The future of crowdfunding, despite the challenges and opportunities ahead, promises further growth and innovation in various economic sectors, underscoring the enduring and increasing importance of this financing model in the coming years.
In future opportunities, we will address topics such as effective strategies for successful crowdfunding campaigns, regulatory landscapes (challenges and opportunities), crowdfunding and social capital, and other overlapping and engaging areas of the subject under discussion.
