Crowdfunding has come a long way in its short history. Today, it is even changing the way we consume. What was once a way to give a largely ready product a helping hand on its final push to market has become a means for consumers to get involved with something still on the drawing board, or simply to buy innovative new products before they’re in the shops.
However, as with so many seemingly new ideas there is a longer history that stretches back prior to the presence of the web. The concept of seeking public patronage and multiple sponsors for projects has existed for many centuries in the arts, erecting statues and in publishing.
Just opening the front cover of any book of English local history published in the Victorian period will reveal a list of subscribers drawn from the local great and good who funded the project. Shakespeare’s earliest success arguably also comes from support similar to modern crowdfunding.
Kickstarter: Sharing risk
At the heart of all crowdfunding is an element of financial risk. Kickstarter is currently the king of crowdfunding but supporting an individual project on the site does not offer any guarantee that it will be successful or even, if it is ever delivered, that it will match the description on the original project page. This is not surprising in the arts world where individual supporters are conventionally asked to fund a concept rather than a specific tangible product. But in other sectors such as technology or satellite engineering a shift in specification may produce unexpected results and dismay its backers.
To mitigate this risk and to encourage supporters to fund projects Kickstarter allows project creators to offer rewards for different levels of support. This has added a second-level economy to the crowdfunding platform and as a result has allowed a number of business models to emerge.
Kickstarter
Those projects built upon the traditional “patron of the arts” model are still at the heart of Kickstarter. Funding is being sought for something that exists for the time being only as a concept, and the rewards are usually minimal. As rewards and tangible products as an outcome are reduced this approach becomes a straight charity model. At an extreme these types of projects become nothing more than begging on the digital high street.
More interestingly there is also an emerging model that in all but name imitates the “Initial Public Offering” (IPO) of conventional corporations. The business offers a permanent non-financial incentive if the project is completed (offers of equity or financial returns are banned on Kickstarter). This could be as straightforward as a permanent discount for backers at a coffee hut.
Consumers disguised as investors
But what if these incentives became the end in themselves? The “ecommerce” model is an increasingly common, and potentially disturbing, approach to Kickstarter. Here, backers are encouraged to support the product not for the final outcome but for the attractiveness of the rewards being offered at reasonable pricepoints.
In effect Kickstarter is being used as a store – consumer agency Trendwatching calls this “pretailing” – with 5% going to Amazon for payment processing and 5% for the services of the site. The service percentage will become increasingly attractive as other sites such as eBay increase their own fees.
The “pretail” model differs from the rest in that the backer is primarily supporting a project because it will produce a tangible product that they will then receive as an early adopter. Bethnals, a London-based maker of unisex jeans, recently raised £12,000 on the site; those who pledged £20 received a t-shirt, those over £65 got a pair of jeans. An “exclusive discount” to show “genuine thanks” to Kickstarter supporters, as claimed on the site, or simply a way to get some orders in early?
The wildly successful 3Doodler project – “$2,344,134 pledged of $30,000 goal” – was a great example of this model. The product itself, a relatively cheap 3D printing pen, was the primary incentive for backers. While hardly anyone pledged the $25 which was rewarded with “limited edition wire art”, the $75+ levels which unlocked the pen itself saw many thousands of pledges.
As Kickstarter and other crowdfunding platforms develop further and the concept of crowdfunding becomes more mainstream these various models will evolve and develop further. This maturity will bring crowdfunding into more direct competition with more established ecommerce providers including Amazon itself.
New business models will encourage more and more mainstream consumers to participate as backers who will be drawn in through the right combination of motivations and incentives that let them overlook the inherent financial risks to see the benefits of the potential rewards.
Gordon Fletcher has previously contributed to three successfully funded Kickstarter project; Sentris, Viking Horde and AppSeed. He has previously received funding from the Technology Strategy Board (TSB).
This article was originally published on The Conversation.
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