Crowdfunding: Creative Financing through Social Media

Crowdfunding is a means of raising money for projects through social media. Using crowdfunding, a large number of people can individually contribute small amounts of money to finance a project.

Generally, a project creator identifies an amount of funding needed for a specified project and individuals pledge varying sums of money to generate the amount required. It is particularly useful for projects that may not qualify for traditional methods of funding.

Kickstarter is based in New York and was founded in April 2009 by Perry Chen, Yancey Strickler, and Charles Adler. It specialises in providing a platform to generate funding for projects falling into one of its 15 creative categories. In order to launch a project on the website, a number of guidelines must be met. Some of which are:

  • The project must be finite and not be simply for an ongoing enterprise i.e. it must be to create a new album rather than a record label.
  • The project creator must set a funding limit and a time limit (between 1 and 90 days) to reach this financial goal.
  • The project must have reached its monetary target within the time specified or the money pledged by individuals reverts back to that individual.

When a donation is made to a project, it is held in an escrow account until the project time expires. At this point the money is either returned to the donor (if the funding goal is not reached) or transferred to the project creator (if successful). If the funding goal is exceeded before the deadline, the project can continue to accumulate funding up until the time limit expires.

The project creator must also set awards to incentivize individuals to donate. In 2009 Emily Richmond wanted to raise funds to sail around the world. To tempt individuals to pledge money, she offered the gift of an origami sailboat for a $5 pledge or a coconut for $125.

Kickstarter charge a fee of 5% on funds raised for successful projects but nothing is charged if a funding goal is not reached. Payments on the Kickstarter site are handled by Amazon Payments and they also charge a fee of between 3% and 5% on the amount pledged to successfully funded projects.

Currently, Kickstarter is only available to project creators based in the US. Because payments are handled by Amazon it can only release payments to creators with a US bank account, address and state-issued ID/drivers licence.

MART is a non-profit visual arts organisation that was established in Galway in 2007 to showcase emerging artists. It has a US base and is currently seeking crowdfunding for a planned US exhibition on Irish immigration called ‘Invite or Reject.’

Matthew Nevin Artistic Director of MART, is using Kickstarter to raise $5,000 for this exhibition because, “…as a website it’s amazing. They’re really nice people. They don’t accept anyone that’s the thing. There’s a procedure to submit your project in. They scrutinise it a good bit and ask you to tweak things. It goes to their members to decide if it’s going to go up or not because they don’t want a load of projects to go up that are not getting funded.”

On launching MART’s project on Kickstarter, Matthew says, “It was really hard. It was probably about 2 weeks of constant work. They want the text right, they pretty much make you do a video. You don’t have to do a video but it’s frowned upon if you don’t. They want you be unique.”

According to Matthew, “As a website Kickstarter is probably the best crowdfunding website you could use because it’s so clean and it is really straightforward and they answer all the questions.”

For emerging talent wishing to take advantage of crowdfunding in Ireland, a new enterprise called Fund it is due to launch at the end of February. Fund it is the creation of Business to Arts, an organisation that brokers relationships between business and the arts.

Fund it is designed to crowdfund a wide range of creative projects. It will accept projects from the entire island of Ireland. Pledges can be made globally in both sterling and euro.

Business to Arts CEO, Stuart McLaughlin, says “it’s an all-or-nothing approach. You have to reach the total. Looking internationally at various models, not just Kickstarter, we found that the all-or-nothing approach is a motivation for the project creators and is also critical in terms of projects being made.”

Fund it believes that social media networks are key to the success of crowdfunding projects. Stuart says “we had been sitting down with various organisations that had been strong in terms of developing their social media network and saying to them – there must be something in this – you’ve got 5,000 friends on Facebook but what does this mean? At the very best it means that you’ve got a very significant portion of people that have bought into you and what you’re doing. At worst, it means nothing actually. Fundamentally though, we believe that kind of network means something.”

Stuart advises potential project creators that “it’s largely social media driven and people need to put a substantial amount of time and energy in making sure that they develop a following amongst twitter and that they have a good basis of Facebook supporters. That’s the primary way of getting the word out on it.”

Marketing your project outside of the crowdfunding sites is a critical part of the process as Stuart explains, “over and above that, what you would say to project creators is that, if for example, somebody is making an album, they need to be working to get onto the pages of Hotpress to be talking about the fact that they are trying to fund this album. When you look internationally, and at other artists that have used other crowdfunding platforms elsewhere, those sorts of things become very significant in terms of attracting people who are outside your network currently.”

Hackfwd: A New Approach to Tech Funding

Hackfwd is a very important new way of bringing early stage, pre-seed investment to tech startups in Europe. Instead of having to navigate complicated financial deals, find VCs with just the right ‘fit’ and get involved in deciphering opaque legal agreements it is possible to have an open, clear and structured understanding of funding arrangements.

For the projects they accept, Hackfwd offers enough money (roughly a year’s salary) for the developer to be able to focus on a project for a year. The amount of funding also depends on whether it is an individual or a team up to the size of three.

The startups get to keep 70% equity. Another 3% is apportioned to advisors and Hackfwd takes the remaining 27%. It is as clear as that.

For a lot of highly focused engineers who are working night on day on their projects many aspects of running a company may be quite unfamiliar. To help with this Hackfwd offers continuous business and marketing advice and there are quarterly passion meets momentum get togethers. These are geeks only events where ideas can be aired and shared.

There are other ways of the way in which Hackfwd does business that separates it from a conventional funding setup, Angel investor, Venture Capitalist or otherwise.

  • Standard agreement versus individual one.
  • Standard valuation versus this whole idea of, “how much I give up is according to how much you trust me.”
  • Standard amount of funding.
  • A promise to say yes or no to the entrepreneurs in 72 hours.
  • Progress is checked three months at meetings held in Majorca.
  • Helping, not with investment managers, but helping with experts in domains, marketing product, HR, finance.
  • As Lars Hinrich, Executive Geek on the board of Hackfwd says, “It is a very different approach to anything that has been out there before.”

    Yet another thing that is different at Hackfwd is in its use of social networks. You must be referred through their trusted network of referrers.

    “It is a trust circle of people that we like and trust and only they can make referrals. The best geeks, in a way, have to hack their way into Hackfwd.

    “That we are only targeting geeks is definitely something that is very uncommon. It is so much easier for an MBA from Insead or Kellog or wherever to get funding. If you look at European geeks and then imagine them pitching them to venture capitalists – no way.”

    The Talent Gap

    “The problem right now is that everything is close to free or is for free. Or it is in the cloud and therefore you don’t need infrastructure. The only thing you buy is talent. So, employing talent is one strategy. Making talent into entrepreneurs is another one.

    “I worked for the last ten years with geeks and I do speak their language. I know what it takes and mostly I saw this kind of brilliance in them as they were creating completely new things. They are the first ones to imagine new things that don’t exist right now. Most others can interpret things they have seen somewhere and use it in maybe a different way for their companies. However, the really cool new ideas are mostly spun out from engineers.”

    The Funding Gap

    “If you look at the talent gap; the geeks don’t know how to set up companies or how to run them or how to do marketing. However, in this new web age all these things are data driven. It is much more logical then it used to be.

    “Think of advertising in the two thousands or the nineties. You had to be super creative and make great artwork, etc. Right now everybody knows how to use Google and everybody knows how to buy traffic. It’s more about knowledge and execution than art. There is no mystery about marketing, it is data-driven.”

    Product Execution Gap

    “The most difficult gap is how to execute on product. I think we are kind of co-creators. We help to frame certain ideas. When we see great technology, with the experience of our group we say, “have you thought about this and this and this?” Suddenly the product changes a bit and we say, “this is really, really cool, let’s get it out.” We are active in the way that helps to shape ideas to the optimum.”

    From an engineer’s or coder’s perspective a lot of what passes for traditional business practice, particularly marketing, can seem like magical thinking. For people who are used to controlling every part of their working environment bringing an idea market can seem akin to the journey home of Odysseus. Hidden and unpredictable perils seem to lie everywhere.

    By using modern digital-age ideas of openness and transparency coupled with the ability to access and analyse data, clearly defined structures and methods can be used by all of us to handle the process of bringing an idea to market and a lot of the seeming mystery of business evaporates.

    In its short time in existence Hackfwd has brought seven companies through its system and will have two more ready to progress in business by the end of this year. What Hackfwd has done is bring greater clarity, structure and methodology to what is already a very challenging task – bringing a product to market.

    The present funding system, as it stands in all its capriciousness and uncertainty, has the tendency to put off and discourage the possessors of the great ideas that can change and improve the world from coming forward to show and share what they have. With emerging new business methodologies and philosophies such as this we now have a greater chance to access the ideas of genius that we may normally have never heard about.