Since the spread of broadband internet, companies have had the opportunity to enter paths beyond established financing channels. The Internet was the great leveller that eliminated distances and ensured that, theoretically, the whole world could suddenly have access to my company. With the help of financial instruments that platforms offered, everyone could suddenly contribute to financing since it was completely digital. However, since not every method and financial instrument is suitable for every company and every phase of the company, we present alternative forms of financing in chronological order in this overview.
In the coming weeks we will be presenting modern, digital financing alternatives. Although nationwide digitisation helped several alternative financing models to achieve a breakthrough, it cannot be denied that their underlying mechanisms have been in use for centuries in some cases. This also applies to the phenomenon of crowdfunding.
The evolution in the field of alternative forms of financing begins with crowdfunding. Here, it is first necessary to distinguish between four different types of crowdfunding, namely
In this kick-off article of our series, we will first address donation-based and reward-based crowdfunding, the two oldest variants.
Donation-based crowdfunding is probably the older form. That people pool their savings to finance a common purpose is not a phenomenon of modern times. Every community is basically a swarm financing (through taxes) and every housing cooperative finances property in this way.
One of the first truly spectacular examples of swarm financing occurred in 1885 in New York, which was unsuspicious in the quasi-socialist context. France had kindly donated to the Americans the Statue of Liberty, designed by Frederic Auguste Bartholdi, which arrived overseas in pieces. However, it lacked a pedestal, which was supposed to cost around 250,000 US dollars (which in 2013 was just under 6.2 million US dollars). Federal funding was not provided and private initiatives did not reach this level.
When all other forms of financing failed, publisher Joseph Pulitzer ran a campaign in his newspaper The New York World. He appealed to the public spirit of the little man, because the statue itself was financed by French taxpayers, so America's counterpart should return the favour and not American tycoons. Within five months, an unlikely 160,000 citizens from all parts of public life and professions, including even children, donated exactly $101,091, less than one dollar per capita. (The United States had a population of 50,189,209 at the time, New York had 1,206,299 inhabitants). The campaign was a resounding success, Lady Liberty has since embodied America's promise, and for the first time it has been shown that the media can play a crucial role in allocating alternative resources.
In the field of the arts, writers and composers had previously taken advantage of the principle of swarm financing, namely to have their works pre-financed. In this way, Alexander Pope was able to translate Homer's "Iliad" into English in 1713. And after Wolfgang Amadeus Mozart had failed to pre-finance three concerts the year before, he succeeded in 1784. 176 minor patrons were mentioned by name in the concert manuscript, similar to Pope's, in recognition of their participation in the concert itself. One would not have put it that way at the time, but this was reward-based crowdfunding.
Almost 200 years later, two things happened that can be confidently described as quantum leaps. In 1996, the British rock band Marillion had their US tour financed by crowdfunding – the artists collected the money from their fans online in an age when the internet was not yet widespread.
Nine years later, ArtistShare, the first crowdfunding platform in the USA, went live to finance artists. Sellaband followed in Germany the following year. Crowdfunding really took off with the founding of the platforms Indiegogo (2008, San Franciso) and Kickstarter (2009, Brooklyn, New York).
Now family, friends and, of course, fans were able to provide direct financial support not only to artists but also to inventors and tinkerers, be it in the pre-financing of an album, an interactive cooler or a video game. The initiators of the projects set up exclusive rewards and give-aways for certain funding contributions, such as the album to be recorded or, above a certain amount, a Skype call with the artist or even a dinner.
What helped Kickstarter and the subject of crowdfunding to a media breakthrough was Amanda Palmer, in the broadest sense the Mozart of her time. The American singer had her album "Theatre Is Evil" financed via the platform and the 1 million US dollars that were collected for the first time for a crowdfunded project generated a huge media echo.
To this date, 18 million people on Kickstarter.com alone have supported 184,982 projects with more than $5.1 billion. The principle quickly found imitators such as Startnext in Germany since 2010. From the very beginning, the all-or-nothing principle applied: Only when a certain minimum funding level is reached does money actually flow to the initiators. If the funding target is not reached, the fans get their money back.
Crowdfunding acts as a fairly reliable barometer of public opinion, so that even established companies such as the Süddeutsche Zeitung used it to analyse the market with regard to the acceptance of new products (website in German). And not only potential investors can see whether a product is well received, but also credit institutions. The Investitionsbank Berlin (IBB), for example, relies on this effect with its IBB MikroCrowd programme, which grants low-interest micro-loans to SMEs (website in German) that come from an SME fund co-financed by the European Union. The basic prerequisite is a successful crowdfunding campaign via the Startnext platform.
One product that was very well received was the extremely popular video game Star Citizen, whose sequel to Kickstarter 2013 initially generated a hefty $2,134,374 - which is tiny considering the $300 million to date that (website in German) more than two million players have contributed to the game's publisher, Cloud Empire, in a crowd-funding exercise conducted by the company itself.
And then there was Oculus Rift.
In the next part of this weekly series, you can read what this data spectacle is all about and what other alternative digital financing options it offers.
Then you might also be interested in the second part of our series "Alternative financing - How companies finance themselves online".