Crowdfunding: Leveraging the power of people, the Internet and social media

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Crowdfunding is not a new concept, but with the Internet and social media, it has gained traction as a powerful tool.

Crowdfunding denotes the raising of funds in small denominations from many people – not just friends and family, but also strangers from afar – and arguably provides a feasible alternative to conventional financing sources for individuals and small enterprises. It is commonly done through online platforms, which usually provides little opportunity for due caution and diligence, and in that sense carries risks for donors and/or investors.

 

There are four general forms in which crowdfunding can occur: donating; pre-financing, which involves the pre-purchase of products and services where, in return for their contributions, contributors receive early versions of the finished products (as exemplified by platforms such as Kickstarter.com); peerto- peer (P2P) social lending, where users lend their funds and earn an interest over the agreed terms within a closed social network (as exemplified by platforms such as Zopa.com); and equitybased investing, where there are expectations for worthy results and some kind of financial return (as exemplified by Growvc.com).

While, on one hand, donating is philanthropy-focused, on the other, equity-based investing is commerceminded, and questions are often raised over why people choose to invest their money outside already-organised markets. General observation suggests three types of crowdfunders: those who feel closely connected to the venture, those who identify a financial opportunity and those who experience both. This further suggests that crowdfunding is largely driven by altruism, hedonism and economical reasons.

Crowdfunding, illustrated (Rocío Lara) .

Crowdfunding started off in the creative industry and was employed by moviemakers, artists and other inventors to help fund upfront costs when launching their creations – indie movie Veronica Mars, which raised over US$5mil over a matter of 30 days via Kickstarter, is an example. In return, donors/lenders/ investors get early bird discounts, special access to the production process and even lunch dates with the directors for large contributions. Crowdfunding has grown rapidly since its inception in 2006, with some 45 nations across the world currently having active platforms, and has since branched out into multiple areas, from personal causes to various other humanitarian pursuits.

As crowdfunding incorporates so many current and future uses across a myriad of disciplines, a broad definition for it is elusive; arguably, a narrower perspective is encouraged, i.e. macrotasks (dividing a job into larger segments with each needing specific specialist skills from a crowd member), microtasks (dividing a job into small simple tasks to attract participation from more crowd members) and crowdcontests (selecting the best submission with incentive rewards from competing crowd members), all of which are forms of crowdsourcing.

 

Crowdsourcing employs the Internet and computer software to offer interesting tasks to individuals while collecting their output for eventual applications, and is therefore a way of organising and coordinating the labour input of various talented individuals. Crowdsourcing can be done without the Internet – pioneering editions of dictionaries and astronomical tables in the early 19th century were basically crowdsourcing efforts. It is realised through having a “crowdsourcer” (the individual who manages the process), the ”crowd” (groups of individuals interested in performing the assigned tasks, often as volunteers) and a “crowdmarket” (a space or marketplace to manage the crowd’s contributions). With the Internet, a larger crowd can be raised more easily.

Generally, people outsource to gain access to talents they find difficulty in locating, to enjoy greater flexibility in addressing market trends or to achieve more with less through matching the best individual to each job. Its early beginnings saw creative artists expanding their roles and capacity through crowdsourcing – individuals such as the founder of the Linux computer operating system as well as the founder of Wikipedia and countless other researchers and scientists were able to retrieve and access data from seemingly inaccessible sources.

The way crowdsourcing is done in Waitrose groceries, England.

Indeed, it provides opportunities for NGOs and small businesses to locate highly specialised skills they do not possess or can ill-afford, and for big businesses to reduce costs when confronting liquidity challenges. But crowdsourcing, like any other business model, can encounter reliability challenges as tasks are put out to people whom the crowdsourcer has never met. Nonetheless, the experienced or clever crowdsourcer never puts things to chance in tackling the reliability issue; they triangulate multiple data from multiple sources and get multiple crowd members to review the output before financially committing further.

A good local example of an effectivelyemployed crowdsourcing can be seen from the business model employed by Datuk Michael Tio Boon Yiaw, CEO of PKT Logistics Sdn Bhd, a major home-grown logistics provider offering high value logistic services and stateof- art warehousing infrastructure. Tio is known to have used crowdsourcing in supply chain management and other aspects of his enterprise. Incidentally, he is also the co-founder of the shiplike Hull University campus in Penang, which is part of PKT’s corporate social responsibility programme. This sort of makes Tio a social entrepreneur in the education sector.

 

Through being a form of crowdfunding, crowdsourcing has developed a bigger life of its own largely because of various economic and related advantages. The Internet enables the matching of funders with creators more effectively and efficiently. As funding in small denominations is feasible online, risk exposure is curtailed particularly when reinforced with triangulation mechanisms. Likewise, affordable communication costs help to improve the quality of information gathering and progressive monitoring for far off donors/lenders/funders, besides enabling them to actively participate in the further conceptualisation and implementation of the funded project. According to The Economist, these advantages raised the confidence of market participants enough to argue that when US citizens employ just one per cent of their investable assets into crowdfunding, they could provide some US$300bil of liquidity into the market.

Crowdfunding helps create more jobs by transmitting capital from the sidelines to small enterprises, funding all sorts of entrepreneurs and putting less emphasis on the elites as does traditional funding. It also creates national output by helping curtail small businesses’ failure rates and agency costs through crowd monitoring, as it is generally harder to defraud a group of engaged participants. Unlike traditional funding, which looks at the quality of business plans, availability of collateral or financial standing of main sponsors, crowdfunding evaluates the perception of a venture’s social value, the calibre of the sponsor’s team with social media networks, the online trustworthiness of the sponsoring team or the general ability to communicate with parties across various social networks.

From this perspective, crowdfunding is said to help alter and invigorate the current global financial system by directing more funds to humanitarian and/or related socially-conscious ventures. According to industry sources, campaigns across the world in 2012 achieved about US$2.7bil across all crowdfunding business models, with the US and Europe accounting for US$1.6mil and US$945mil respectively – some 95% of the global market. Asia pulled in US$30mil, while US$80mil came from various other parts of the world.

While donations and reward and lending-based crowdfunding raised some US$1.4bil and US$1.2bil respectively, equity-based crowdfunding raised only US$116mil. This has been attributed to legal restrictions, especially in the US and Europe. With envisaged loosening of restrictions in both these places, equitybased crowdfunding is expected to rise dramatically from 2014 onwards.

Singapore's Crowdsourcing Week in 2013.

Where Asia is concerned, rewardbased portals are being developed in Singapore and Malaysia. In the latter particularly, crowdfunding is at a very nascent stage where small numbers of individuals are pitching for very small sums to fund personal causes through a limited number of crowdfunding platforms. This is because, like other economies, equity-based crowdfunding is generally disallowed, and P2P lending and pre-sales crowdfunding are not yet ongoing due to general unfamiliarity and legal constraints. However, local social entrepreneurship can be encouraged from its current embryonic stage by making crowdfunding more user-friendly and flexible so that disadvantaged individuals and those with modest means can tap them more easily. It has been reported that SME Corporation Malaysia is currently coordinating recommendations to the government to streamline and render more effective support programmes from various institutions and sources for SMEs before the end of 2014.

And so, it may be better to view social entrepreneurship and crowdfunding not as alternatives to commercial entrepreneurship and conventional funding, but rather as complementary mechanisms. Each has its own important and unique roles to play.

P. S. Yeoh is a retired businessman and academician. He currently does research as a hobby.



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