Crowdfunding The Revolution

Once described as a revolution in funding, crowdfunding has now grown to the point where it is being used to fund revolutions itself. But is it always a good option for individual creators?

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By Villa Giulia, Public domain via Wikimedia Commons

While crowdfunding has arguably been around for generations it has shot to particular public attention in the last few years. It has gone from being described as a quiet revolution in business to funding political revolution in the form of a recent full page advert in the New York Times protesting the Turkish government.  Projects have been set up for aims as diverse as ensuring accurate reporting of controversial court cases and sending struggling artists to perform at the Edinburgh Fringe. Crowdfunding is becoming popular.

And it’s easy to see why. With the persisting financial crisis, entrepreneurs and smaller businesses have often found traditional sources of funds to be lacking. Crowdfunding has proved an attractive alternative: last year alone, over U.S. $2.7bn was sourced from backers to fund over a million successful projects. Some even raised as much as a hundred times their initial goal. Raising money from the crowd can allow individuals to start small with greatly reduced start-up costs while at the same time allowing them to retain creative control of their works. Without large investors exerting control over intellectual property rights crowdfunded artists are often able to choose freely whether to monetise them or give them over to the commons.

From the perspective of business models, crowdfunding efforts break down into three broad arch-types: lending, donation, and reward. The first of these, lending, is the one that most closely resembles traditional funding opportunities. However this route can often prove extremely difficult in practice, particularly for the individual creator. Offering shares or securities in return for investment is a complex and legally regulated field and while it is possible to arrange crowdfunded investments within this framework individuals in particular may find it challenging to make sure that they are aware of and comply with all of the necessary laws without resorting to expensive legal help.

It is unsurprising therefore that creators have turned predominately to the donation and reward approaches. The donation model is straightforward – the project is funded through contributions from backers who receive nothing in return other than the success of the project. While this has proven the most frequently used model to date there has also been significant use of a rewards based model whereby the backer receives either a financial return of their investment with interest or, more frequently, goods such as a copy of the finished work.

These approaches offer advantages to creators that extend beyond simply gaining funding. A successful funding campaign demonstrates the market value of the idea and the creator behind it to future investors, generating information about the audience and demand for the project. In addition, involving the backers in the project helps drive publicity and awareness of the creator and can help the creator to involve their audience and engage them with the creative process. Increasing fan investment in the community in this way can only help in the long term.

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Therefore, as a source of capital in these cash starved times, crowdfunding can offer an attractive prospect to budding creators. But is it all as good as it seems? The potential for a successful campaign to improve a creator’s reputation is matched by the potential for an unsuccessful campaign to damage it. Over half of the projects on the largest crowdfunding site Kickstarter do not meet funding goals, often by significant amounts.

Indeed people often join projects only after it looks like they will be successful. In addition, some categories of projects are more likely to be successfully funded that others: videogames for example receive as a category six times the investment as other types of project, but very few of the extremely successful projects are in fields where individual creators predominately work. While crowdfunding sites that are more suited to creative endeavours and which specifically target the arts exist, the amount of funding available on them to date is a fraction of that available from the largest sites. The massive funding seen in some projects may simply not be obtainable, and even unnecessary, for some individual creators.

Crowdfunding campaigns also take a lot of time and energy – more than many creators realise. In order to be successful at crowdfunding, creators need to: put together a polished pitch; manage communications with backers; keep track of finances and funding allocation; and, motivate pre-existing communities of supporters to get the best chance of success. For individuals, keeping track of all of these aspects on their own can present a huge challenge. However, failing to meet it can lead to upset backers and a damaged reputation that few can afford to ignore.

While crowdfunding offers a valuable tool for funding creative endeavours it doesn’t offer a magic bullet to solve the perilous finances of many creators!

Has ‘freemium’ had its day?

The freemium business model has become increasingly prevalent as online markets grow. But recent troubles raise the question: has the bubble burst?

Freemium is a popular model: with social games such as Farmville, file storage such as Dropbox, and even survey platforms such as Survey Monkey using it, most of us have encountered it at some point. But recent months have been marked by a number of blows that have led some to question whether the freemium model can survive in the future. The producers of Farmville, Zynga, have announced that nearly a fifth of their workforce is being laid off and Flickr, once thought of as the poster child for the model, has quietly shifted their focus to generating advertising revenue instead. Investigations by the UK Office of Fair Trading (OFT) amid concerns that games using the model could be unfairly pressuring children have done little to lighten the cloud of gloom.

Generally, the freemium model involves giving the core product away for free while charging for additional features or enhancements. Giving an offering for free reduces the psychological barriers to trying the product and converting some of the resulting users to ‘paid additions’ generates a continuing revenue stream.

But such an approach faces several limitations. The relatively low conversion rates, from free to paying users, experienced by most offerings – often as low as 1%  – means that for the model to work, a large market is needed: this is not an approach that can work as well in niche fields. However, even in larger markets, attracting the notice of potential customers can often require a big marketing spend. Smaller creators may struggle to break in on their more limited budgets. In addition, the scale of the offering necessary to reach a large market only works if the cost of giving away the free copies (the marginal costs of duplication) is extremely low. After all, for every paying user there will be tens who are not contributing anything to the costs of distribution. All of these additional costs have led some to argue that freemium is a ‘costly trap’.

However, these challenges do not mean that the freemium model must necessarily fade out in the future. It may not be a model that works for everyone. But for those who can cope with the limitations it imposes, it continues to offer a growing source of revenue. In particular, the freemium model continues to gain traction in the MMO videogames field, with even top tier titles such as EA’s ‘Star Wars: The Old Republic’ transitioning from its initial subscription model to freemium and almost doubling its revenue in the process. As recently as march this year, executives from EA continue to stress the importance of freemium to their future commercial strategy and freemium games continue to dominate mobile app stores.

For the gaming industry at least, freemium appears far from dead. The recent troubles faced by those using the model serve to illustrate its limitations but there is nothing fundamentally flawed in the underlying approach. For some creators, it remains a viable way of monetising their works and will continue to do so for the foreseeable future.