Crowdfunding has been existing long before the advent of the internet and social media. For example, during the 1730s, customers of the Bank of England demanded their pounds to be converted into gold to support and restore confidence in the currency. French philosopher Augustus Comte issued notes and sought the public to support his work during the 1850s. The construction of the base of the Statue of Liberty was funded after a newspaper spearheaded a campaign that successfully raised enough money from small donations.
However, it is important to note that American entrepreneur Michael Sullivan has been credited to be the first person to use the term “crowdfunding” in 2006 when he was looking for people to support his vlogging project. He drew inspiration from the concept of “crowdsourcing,” which was another term coined by American journalist Jeff Howe in an article he wrote for Wired magazine during the same year. The word eventually found itself in dictionaries and has been used as part of the modern vernacular.
The digital information age and the resulting explosion of web 2.0 applications such as blogging and social media have been instrumental in promoting crowdfunding. The 2000s saw the emergence of companies that operated websites that allowed individuals and organizations to raise funds through public participation. Examples include the first-ever crowdfunding platform called ArtistShare created in 2001, the business-oriented platforms IndieGoGo and Kickstarter, and the advocacy-centered platforms GoFundMe.
Advantages of Crowdfunding: Benefits, Notable Applications, and Impacts
Of course, to understand the benefits or advantages of crowdfunding, it is important to define it both as a form of alternative financing and as a subcategory of crowdsourcing. The practice centers on raising funds from a large number of people to finance a business venture, a specific project, or even an event and social cause. Those who participate often become both contributors and supporters. The overall experience from the perspective of these supporters is more personal than traditional fundraising platforms and activities.
A 2013 articled by Reuters and published in the Huffington Post mentioned that crowdfunding websites helped individuals and organizations raise USD 89 million in 2010 alone and this figure jumped to USD 2.66 billion in 2012. Another report by The Crowdfunding Centre cited in an article from Entrepreneur showed that the global crowdfunding initiative was raising an amount of USD 60,000 each hour during March 2014.
The practice has several success stories. For example, Pebble Technology raised funds for its several smartwatch devices via the Kickstarter platform beginning in 2015. Australian investors Cedar Anderson and Stuart Anderson raised over USD 12 million for their Flow Hive beehive design via IndieGoGo. Their campaign started in February 2015 and they successfully shipped a total of 51000 orders across the world in March 2018.
Even artists and creatives have benefitted from the advantages of crowdfunding. American epic fantasy writer Brandon Sanderson used a Kickstarter campaign to raise the needed money for publishing his Surprise series of novels in 2022. American filmmaker Rob Thomas also used the same platform to produce the “Veronica Mars” new-noir film in 2014. Some record producers and pop artists also use similar platforms to fund their projects.
The GoFundMe platform also has numerous infamous campaigns that assisted the medical needs of individuals and organizations. These include the Bucks For Bauman campaign of Jeff Bauman which he created after he lost his legs during the Boston Marathon bombing in 2013. A 2021 study by M. Igra et al. showed that crowdfunding campaigns and activities increased in response to the COVID-19 pandemic. Some of these campaigns successfully raised 25 percent of their needed cash for medical treatment and other healthcare-related expenses.
It is also important to highlight the fact that reach is another advantage of crowdfunding through the use of online-enabled platforms. These platforms are readily accessible to individuals who have a connection to the internet. Creators can use other mediums within the realm of the internet to promote their campaigns. Most of these platforms also actively promote existing campaigns to their existing pool of backers. Global reach is possible.
Considering the aforementioned examples and impacts, the following are more specific applications and benefits:
• Alternative Source of Capital: One of the applications and obvious benefits of crowdfunding is that it provides entrepreneurs, startup companies, and established organizations with a platform to raise the capital needed to develop their products or establish their businesses. This is an ideal alternative to venture capital, angel investment, loans, and other forms of financing for individuals who cannot access capital due to poor credit scores or the absence of a network of possible investors.
• Market Feedback and Testing: A particular crowdfunding campaign can also serve as an instrument for entrepreneurs to test whether or not their idea would be received by their target market. Positive response as measured by the number of supporters or backers can be indicative of market success. Entrepreneurs can also tap their existing backers to test and improve further their prototypes before formal market release.
• Advancing Science and Technology: The platform can also be used to raise the money needed to fund a particular science project or ongoing research. The benefits to researchers include having possible access to a pool of funds without the need for government grants or funding from the private sector, independence from possible interventions, and reduced conflict of interest. Hence, when used appropriately, another advantage of crowdfunding is that it can promote innovation.
• Promoting Advocacies and Causes: Several individuals and organizations have used the platform to raise needed money needed to promote a particular advocacy or cause and roll out activities related to such. It is fundamentally an alternative to traditional fundraising activities. Using the internet and social media can help these advocates better target like-minded people and gain support. These people or backers can become involved in their advocacies not only as funders but also as well-rounded supporters.
• Resolves Healthcare Needs: The cost of healthcare is expensive. Even developed countries such as the United States have a healthcare problem. Another benefit of crowdfunding platforms such as GoFundMe is that it provides individuals with an opportunity to raise fund and pursue needed medical attention. These platforms fill the gap created by the shortcomings of the healthcare system.
• Supporting Creative Professionals: Artists and other creative professionals often suffer from a lack of funds to pursue their projects. Some of these individuals need the backing of art patrons or distributors such as publishers. Crowdfunding gives them another option. Some of the specific benefits of using relevant platforms include independence from third parties, more artistic and creative freedom, idea testing through market feedback, and building an audience base or capitalizing on existing supporters.
Disadvantages of Crowdfunding: Problems, Notable Issues, and Controversies
The disadvantages of crowdfunding revolve around specific limitations and issues that create problems either for the creators of crowdfunding campaigns or their supporters or backers. This alternative form of financing and a subcategory of crowdsourcing has had its fair share of criticisms and controversies since exploding in popularity in the 2000s.
Some of the controversies in the past centered on fraud. For example, a team of investors was developing a product that would allow users to breathe underwater for 45 minutes at a maximum depth of 15 meters without the need for sophisticated breathing apparatus. They eventually called this device “Triton,” launched a crowdfunding campaign in 2016 via the IndieGoGo platform, and raised nearly USD 1 million to start further refinements and mass production.
However, some observers and experts began doubting the claims. Note that its inventors claimed that Triton works by removing oxygen from the water. But the science did not add up. Experts were quick to point out that it is impossible to separate dissolved oxygen and water because the concentration of the latter is relatively low to become even useful for humans. The inventors refunded the money in 2016 but relaunched a new campaign immediately and raised USD 300K at the end of the same year. The product has not appeared in the market since.
There are also inherent problems transpiring within the crowdfunding community. A 2014 Huffington Post article by serial entrepreneur Nathan Resnick explained that the Kickstarter platform has been corrupted because of the rise of paid advertising, investor-backed campaigns, and so-called crowdfunding agencies that give an unfair advantage to certain campaign creators while duping other creators and the community of backers.
Special attention should be directed toward investor-backed campaigns. Some venture capitalists and angel investors have used crowdfunding platforms not to raise funds for particular projects or startups but to gauge market receptibility. Digital marketing firms have also positioned themselves as crowdfunding agencies and offered their services to creators to promote their campaigns better while taking excessive cuts. These practices have defeated the intention and purpose of tapping the public and asking them to rally behind a particular idea.
Fraudsters have also used platforms to siphon money from the public. An exploratory article by Melanie Newman explained that some individuals and groups used crowdfunding platforms to offer alternative treatments to cancer patients. These patients spent thousands of money to back these dubious campaigns. Other observers have identified different fraudulent activities carried out through relevant fundraising platforms. These include the creation of clone firms, misleading campaigns to fool investors, misuse of funds, fake platforms, and unregistered firms.
Other problems and issues with crowdfunding involved fundraising campaigns for medical treatments or for covering healthcare costs. A journal article by Julia Sisler mentioned that the popularity of medical crowdfunding can be considered a symptom of a poor and failing healthcare system. Another article by L. S. Berliner and N. J. Kenworthy that campaigns that get the most attention and funding often depend on perceived deservingness.
C. Dressler and S. A. Kelley also wrote about the ethical implications of these activities because campaigns often force their creators to post as many details as possible about patients. The result is a loss of patient privacy. Studies showed that financially successful campaigns tend to disclose extensive personal information about the patients. Inequalities due to gender, class, and race discrepancies have also been observed in these fundraising activities. Successful campaigns often involved creators or patients well-connected with large social networks.
In considering the aforementioned examples of issues, the following are the specific disadvantages and limitations:
• Lacks Investment Regulations: One of the disadvantages of crowdfunding from the perspective of investors is that it is not as regulated like other securities or financial markets. Regulations protect the people from risking too much of their money. Some brokers and advisers uphold their fiduciary duty by subjecting investors to suitability assessments to promote and protect their interests.
• Reputational Risk to Entrepreneurs: Raising capital from third parties can put pressure on entrepreneurs and business organizations. This is normal. However, when coursed through a bigger pool of possible backers, there is a risk of lasting reputational damage if a particular entrepreneur fails to meet targets such as product launch date or achieve specific goals and objectives such as market success.
• Intellectual Property Infringement: Another disadvantage of crowdfunding from the standpoint of inventors or entrepreneurs is that they are forced to disclose to the public relevant details of their ideas or specifications of their products. Doing so means risking intellectual property theft. Their competitors could readily develop the same idea or product. This risk is higher if a particular inventor failed to file or register the necessary intellectual property rights for his or her idea or product.
• Hit or Miss Campaign Results: Several campaigns have become successful. However, a lot have failed to meet their targeted fund. Some campaigns receive more mainstream attention while others have remained unnoticed. Medical crowdfunding has also been riddled with issues of biases and concerns related to ethics. Most patients fail to get their received funding targets due to variables such as lack of social network, the severity of their medical case, and class or racial identification.
• Saturation in the Market: One of the reasons why most campaigns fail is that there is too much out there in the market. Campaigns are fundamentally competing against one another for media and public attention and, most especially, for funds coming from the common people. There is a possibility that a particular campaign is only popular due to its novelty but it would not be sustainable or would not receive the same attention and support the second time it needs additional rounds of funding.
• Existence and Persistence of Fraud: Nevertheless, the continued existence of fraud is one of the main problems and disadvantages of crowdfunding. Backers who fail to perform due diligence might readily fall prey to fraudsters. There are creators who use relevant platforms to raise money but some might have a genuine purpose but still end up fraudulent because they failed to self-regulate.
FURTHER READINGS AND REFERENCES
- Berliner, L. S. and Kenworthy, N. J. 2017. “Producing a Worthy Illness: Personal Crowdfunding Amidst Financial Crisis.” Social Science & Medicine. 187: 233-242. DOI: 1016/j.socscimed.2017.02.008
- Clifford, C. 2014. “Crowdfunding Generates More Than $60000 An Hour.” Entrepreneur. Available online
- Dressler, G. and Kelly, S. A. 2018. “Ethical Implications of Medical Crowdfunding: The Case of Charlie Gard. Journal of Medical Ethics. 44(7): 453-457. DOI: 1136/medethics-2017-104717
- Igra, M., Kenworthy, N., Luchsinger, C., and Jung, J.-K. 2021. “Crowdfunding as a Response to COVID-19: Increasing Inequities at a Time of Crisis.” Social Science & Medicine. 282: 114105. DOI: 1016/j.socscimed.2021.114105
- Newman, M. 2018. “Is Cancer Fundraising Fueling Quackery?” British Medical Journal. 2018: 362. DOI: 1136/bmj.k3829
- Resnick, N. 2015. “Why Kickstarter Is Corrupted.” Huffington Post. Available online
- 2013. “Global Crowdfunding Volumes Rises 81% in 2012.” Huffington Post. Available online
- Sisler, J. 2012. “Crowdfunding for Medical Expenses.” Canadian Medical Association Journal. 184(2): E123-E124. DOI: 1503/cmaj.109-4084
