The wisdom – and cash – of the crowd could support the public sector
Crowdfunding, the internet-based form of fi nance popularised in America, is taking off in Scotland. Bloom VC, established by businesswoman Amanda Boyle and social media expert Michelle Rodger, is celebrating the successful funding of its first projects.
A short film, an album, a web platform to promote Scottish musicians and a contemporary dance production premiering at Edinburgh Fringe, hawwve reached the financial goals. Bloom is providing a way for business start-ups, social enterprises, community projects and arts ventures in Scotland to appeal to ordinary people, by-passing banks and government schemes.
Hopefuls simply pitch their idea and wait to see if enough people like it in order to reach a preset fi nancial goal. If they are unsuccessful, no money changes hands. If successful, supporters either receive something in return or are simply content to have helped a worthy ambition be fulfilled. Bloom takes a 5 per cent fee and PayPal, which handles payments, between 3 and 5 per cent. The model is similar to Kickstarter, the New Yorkbased crowdfunding platform.
Earlier this month, one Kickstarter project – to make a digital watch called the Pebble – closed its fundraising at £6.4m having set out to raise only 1 per cent of that sum. While Bloom is in its early stages by comparison and emphasises the grassroots nature of many of its projects, cofounder Boyle is delighted with progress.
“Two years ago when we fi rst started working to bring Bloom to life, nobody knew what crowdfunding was,” said Boyle. “Now people recognise the term and want to know more. We’re working hard to ensure crowdfunding changes the funding landscape for ever. It will become an accepted alternative source of fi nance for start-ups, businesses, community projects and social enterprises. We are seeing some amazing projects coming through, and some equally amazing acts of generosity to support these projects.
“And what’s clear also is that it’s not just about the money. A crowdfunding campaign brings so much more – proof of concept, demonstrating market appetite, an advance order book, an engaged community of customers and backers who are so keen to buy your product or service that they will pay you to start up, [and support you with] profile raising and media awareness. Beyond the project there’s also the opportunity for mentoring and support from backers”
There are currently around 16 live projects on Bloom. Examples include Bonnie Bling, an award-winning designer who creates jewellery using Scots slang. She is looking for £7,500 to buy her own laser cutter so she can manufacture in Scotland. And Foodshare Scotland which is aiming to establish a network of food co-operatives across the country.
Behind the scenes, there are more than 50 projects preparing to go live on Bloom, ranging from music and fi lm to the spinning of Icelandic silk, technology and video games and food projects, including one, inspired by Jamie Oliver’s 15 restaurant, to support recovering addicts and homeless youngsters.
For the public sector, Boyle says: “Crowdfunding is changing the financial landscape and offering new opportunities and alternative sources of fi nance to charities, communities and social enterprises. It’s a challenging financial environment for these types of organisations, and Bloom offers a solution to the funding gap for community projects that are financed more by local people than increasingly reduced government funding.
“If the public sector can’t help communities, for whatever reason, then they should be encouraging them to use crowdfunding. We are actively building strategic partnerships with organisations that provide grant funding to communities and social enterprises, with a view to creating opportunities for crowdfunding to trigger matched funding.
“So, for example, a community that needs £5,000 for a project could raise half on Bloom and seek half from a funding body. Everybody wins, in that the funding body’s money goes further and the local organisation ends up with a bigger donor pool, a database of new backers to whom they can go back in future and ask for support, and a knowledge of fundraising using social media which they can use in other campaigns.”
While Bloom is leading the way in the UK, globally, crowdfunding platforms raised nearly £1bn last year, according to a study released by massolutions, a research firm specialising in the concept. Although that figure is expected to double this year, it pales in comparison to the hundreds of billions lent by banks, even in these straitened times. But the study suggests that crowdfunding has become a viable form of capital formation, according to Carl Esposti, the company’s chief executive and founder of Crowdsourcing.org.
“As large sums can be raised via crowdfunding, it has become a viable alternative for capital formation for new commercial ventures, projects and both social and community-based initiatives,” Esposti said. “Driven by equity-based and rewardbased crowdfunding, our forecasts indicate total funds raised will nearly double year.” The study said that there were 452 crowdfunding platforms active worldwide and this could reach around 530 by the end of this year. “There’s actually a great deal of strength in the idea of having many people behind a plan,” said Esposti.
“Looking at what types of projects being funded, see some patterns emerging. There are cause-based initiatives that appeal to people’s passions or philanthropic needs or interests and other projects that get funded by appealing to their fanbase.
Another sector that does well is digital goods and media, which appeal to tech and social-media savvy people.
“Yes, it’s true to say that this supports the argument that these investors aren’t making decisions on a purely economic basis but, as a crowd, their expression of support or interest in a venture, product or service has validity and can’t be ignored.
“Crowdfunding puts the crowd investor in direct contact with the entrepreneur. There are no ‘smart’ investors in the middle – just the crowd investor, the platform and the entrepreneur.
“We shouldn’t underestimate the power of the crowd to form their own view, to share their opinions and to either show support or reject proposals by acting en masse.
“In some cases the ability to market test products or services via the process of crowdfunding is also allowing companies to gauge the level of market interest and in many cases to actually pre-sell product before it’s manufactured. For example, the team behind [the] Pebble were turned down by many venture capitalists who thought the idea of a smart-watch, as an accessory to a smart-phone, wasn’t what the crowd needed.
“The crowd begged to differ! They raised one hundred times their goal raising a total of $10m, an average of $140 per investor, and pre-sold 67,000 units against a fi rst production run of 80,000 units.
What a phenomenal way to calibrate the desire for your product and establish the required inventory.
Also, the social experience of crowdfunding, as the news of interesting projects propagates across social networks, drives a huge level of publicity that you simply couldn’t buy.” Kickstarter is the most It began in 2009 as an online community designed to help artists, musicians, athletes, inventors, and filmmakers raise small sums of money from a large number of patrons to help them fund their projects. Concert promoter Perry Chen approached a music site editor, Yancey Strickler, with the idea and together, web designer Charles Adler launched the site.
In 2011, visitors pledged £63m to more than 27,000 projects. In return, investors receive a tangible product, or a ticket to a show, a credit on a film or, in the case of the backers of a budding street-food vendor, a pizza.
This year Kickstarter boasted the first of several million-dollar projects, culminating in its most successful so far, the Pebble.
Eric Migicovsky, an engineering graduate, had wanted to develop a line of wristwatches that could display information from an iPhone but found that technology venture capitalists prefer software. Less than two hours after his Pebble project went live on Kickstarter, it hit its goal of £64,000. With £6.4m in the bank, he and his co-founders still own 100 per cent of the company.
Now they just have to make and begin shipping it by this September to the 67,000 people who believe they have not so much won a watch, but backed a winner.