HOW DEMOCRATIC IS CROWDFUNDING?

The basic concept behind crowdfunding is simple: a relatively large number of investors contribute a small amount each to finance a project, business, or organization. There are two main ways in which this could be seen as democratic. First, it can give individual investors a strong sense of involvement in the way companies and projects are run. Second, it is often said to give smaller, newer companies a chance to compete against larger, established ones.

Crowdfunding is not a new idea. As far back as 1700, a large group of investors provided loans for poor families in Ireland. Nearly 300 years later, in 1997, the first instance of modern crowdfunding is said to have occurred when British rock group Marillion financed a US tour by asking fans for donations. This was possible because many fans of the band were early adopters¹ of the internet. Today, with the rest of the world joining them online, organizations and businesses have a worldwide pool of investors to draw upon.

In the years after 1997, much crowdfunding remained focused on² artistic projects, charities, and not-for-profit organizations; this is usually based on reward crowdfunding (RCF). RCF does not promise investors any financial return. Instead, those who donate might, for example, be mentioned by name in the book, film, or building that they help to fund. RCF is now also being used by entrepreneurs as well-they promise participants³ a product or service in return for their money should the business succeed. With fairly low rewards, business-based RCF investments are usually small, too, at an average of just $99 in 2020.

Another way of generating investment is equity crowdfunding (ECF), which is mostly used by businesses. Like stocks and shares, this promises investors a financial return. Through accessible websites like Crowdcube, Fundable, and IndieGoGo, ordinary people invest small amounts at relatively low risk. ECF is particularly helpful to start-ups⁴ and small and medium-sized enterprises⁵ (SMEs). The financial crash in 2008 left banks nervous about giving loans to start-ups and SMEs, so, needing an alternative, many businesses turned to ECF for its greater equality of opportunity. By June 2017, in the UK alone, 400,000 investors had put some $700 million into 1,538 different business ideas.

As well as providing much-needed investment, ECF has several other virtues. It allows start-ups and SMEs to develop at their own pace. Without the pressure caused by being in debt to banks, businesses can take more risks and innovate. Another advantage is that the individuals who invest in ECF are more likely to engage with⁶ the business than traditional shareholders, offering feedback and suggestions along the way. This is good for the company's development, and investors—whatever they contribute-feel they have an influence on the trajectory of the business.

However, crowdfunding may not be quite as democratic as it first appears; although money is spread between more companies, investors still invest in some more than others. The clue is in the name: in crowdfunding, people often follow the crowd. So, while new entrepreneurs can benefit from ECF and RCF, investors are often most attracted to those with a track record of success; even with small investments, individuals tend to be cautious. Also, businesses with more initial funds can afford more publicity and can pursue⁷ more potential investors. The geographical⁸ distribution of successful businesses is not equal either. Those in certain areas—often around university campuses-tend to do far better.

Crowdfunding is never totally risk-free, and between 2011 and 2015, eighteen percent of all crowdfunded businesses in the UK failed completely, leaving individuals with little or nothing to show for their money. Over the same period of time, of crowdfunded businesses supported by "experts," none failed. This would suggest that thorough research is essential, but amateur investors tend to be quite spontaneous. According to one study, on average, crowdfunders do just twenty minutes of research prior to⁹ investing. Those with training and specialist knowledge, on the other hand, are far more likely to see significant gains from ECF investments. So, rather than remaining a way for ordinary people to invest small amounts, ECF is becoming a way for venture capitalists-experts in risky investments to expand their portfolios and make large amounts of profit; investment groups and even banks are increasingly investing in ECF, too.

Crowdfunding undoubtedly has the potential to be a dynamic, democratic way for artists, start-ups, and SMEs to generate funds. It also allows smaller investors to feel engaged and involved. However, it may also prove to be a victim of its own success as professional investors increasingly dominate the crowdfunding landscape.

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Veronica Mars: A Crowdfunding Success Story?

In 2004, a new drama appeared on the US channel United Paramount Network. Aimed at teenagers and young adults, Veronica Mars told the story of a young woman who was in the process of graduating high school and moving on to college while also working as a private investigator.

The first season was a hit, regularly attracting 2.5 million viewers and winning several awards. But in 2007, after four seasons, the show was canceled, and shocked fans were told it would not return. The show's writer, Rob Thomas, announced he was working on a movie version, but his idea was declined by major studios. For many movies, this would have been the end of the story, but a friend had told Thomas about a relatively new website.

Kickstarter is a crowdfunding site that focuses on finding backers for creative projects, and in 2013, Thomas used it to announce that he was looking to raise $2 million to make the Veronica Mars movie. Those donating $10 would be emailed a PDF of the movie's script upon its release. Larger donations would bring rewards, including stickers, T-shirts, signed posters, and personal messages from cast members. Those donating $5,000 would be given a private screening of the movie before its release.

Thanks to social media, news of the project spread quickly, and the target of $2 million was reached in just eleven hours. By the end of the fundraising drive, 91,585 backers—still more than any other project in the history of Kickstarter-had given a total of $5,702,153. The film was finally released in 2014 and, though popular with fans, made only $3.5 million back in ticket sales. One certain winner was Kickstarter, though, as the website receives five percent of the money every project raises.