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7.5: Startup Funding- Crowdfunding

  • Page ID
    17708
  • CJ Cornell

    Crowdfunding, which barely existed a few years ago, spread to every aspect of society—from funding creative projects, local civic projects to causes and charities, and of course—funding startup companies. Today, crowdfunding is an essential part of every entrepreneurship conversation.

    Modern crowdfunding has the following haiku-like definition:[1]

    • An individual or organization,
    • on behalf of a cause, a project, a product, or a company,
    • solicits and collects money,
    • usually in relatively small amounts,
    • from a large number of people,
    • using an online platform,
    • where communications and transactions are managed over electronic networks.

    Crowdfunding is one of the great movements of the twenty-first century, and one of the most powerful. Still in its infancy, crowdfunding moved beyond Kickstarter-like passion projects and became a major new and disruptive force in investment funding. And just in the last few years, the crowdfunding movement impelled the U.S. Congress, state legislatures in all 50 states and the Security Exchange Commission to overhaul investment laws that existed since 1934.

    Broadly defined, crowdfunding is collecting small amounts of money from a large number of people. With the advent of social networks (abundance of people on the network), crowdfunding only recently became practical. But the concept has been around for centuries—except that with crowdfunding, the people willingly contribute money for a project, product, or cause that they believe in.

    Crowfunding—a Little History

    The concept of crowdfunding is old. What’s new is applying technology—social networks—to the process. This allows interested supporters from around the globe to support any project, anywhere, as long as they share passion and see merit in the project’s goals.

    In the early 1880s, France gave the United States a gift: the Statue of Liberty. It was shipped to New York City where remained packed in crates for over a year. Why? The New York state government would not allocate the $200,000 required to build and mount the statue onto a pedestal (today this would be over $2.5 million). Newspaper mogul Joseph Pulitzer ran a fundraising campaign through his “New York World” tabloid—offering to publish the name of everyone who donated, to the front page. Donors also would get little rewards: $1 got you a 6-inch replica statue and $5 got you a 12-inch statue. The campaign went viral. Within six months of the fundraising appeal, the pedestal was fully funded, with the majority of donations being under a dollar.

    But this was not the first crowdfunding campaign. For centuries, book authors have appealed to the crowd for funding. Kickstarter (the largest crowdfunding site) proudly recounts one of the earliest examples:[2]

    In 1713, Alexander Pope (the poet) set out to translate 15,693 lines of ancient Greek poetry into English. It took five long years to get the six volumes right, but the result was worth the wait: a translation of Homer’s Iliad that endures to this day. How did Pope go about getting this project off the ground? Turns out he kind of Kickstarted it.

    In exchange for a shout-out in the acknowledgments an early edition of the book, and the delight of helping to bring a new creative work into the world, 750 subscribers pledged two gold guineas to support Pope’s effort before he put pen to paper. They were listed in an early edition of the book.