From the beginning, I have maintained that crowdfunding will become an investment standard, the go-to system to raise funds and one of the best methods for sound return of investments.
Long before the JOBS Act came into play, however, crowdfunding (or its methodology) was already used in the US as a means to fund projects. One of the most prominent examples is the construction of the Statue of Liberty in 1884.
When resources for the completion of the pedestal for the historical landmark fell short, Joseph Pulitzer used his newspaper to call upon the public for donations to finish the plinth. More than a hundred thousand Americans joined in the campaign and chipped in small increments to raise some $100,000. Although crowdfunding was not the term used then, the practice resembles the same principles.
The term “Crowdfunding” is credited to Michael Sullivan when he used it in his blog fundavlog in 2006.
Merriam-Webster now defines it as “the practice of soliciting financial contributions from a large number of people especially from the online community.”
Oxford describes it as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”
Clearly, both accounts show that crowdfunding requires two components to make it work: solicitation from the “crowd” to raise funds, and using the web as the community. These premises make crowdfunding an exciting scheme as everyday citizens can now invest using social media as the “trading floor.”
But as it sweeps almost every industry, its remarkable progress also demands further definition, if only to be more apt in all perspective. Crowdfunding is no longer merely online solicitation from the crowd, it goes beyond that.
I describe it now as “the practice of raising funds from two or more people over the internet towards a common Service, Project, Product, Investment, Cause, and Experience or SPPICE.”
The significant improvement in its definition is the involvement of the crowd to achieve overall — not just monetary — success. It’s not just about putting one’s money in a project. Rather, it is crowd collaboration to make sure the project succeeds.
We see how films, theatre, arts, and those in the entertainment industry now rely on crowdfunding to pursue their objectives. The industry gains a lot of support from the crowd, and it’s a very viable market.
Real estate projects likewise succeed through crowdfunding. The key ingredient to the success is the involvement of the crowd, beyond the investment they put in. Fundrise, for instance, became a leading real estate crowdfunding platform because it makes use of community participation. And with $31 million poured in from investors to the platform itself, we can say crowdfunding is now being embraced by the big boys.
The emphasis on crowd participation also greatly benefits charitable causes. This realm enjoys a huge support base primarily because of social involvement. Crowdfunding takes non-profit causes notches higher due to interaction amongst collaborators and donors. The power of social media furthers cause-oriented activities because everyone is given the space.
Even companies resort to the crowd in launching new products in the market. There’s a higher probability that a crowdfunded product will achieve success since the investing crowd will certainly back it up. That’s why it’s a clever concept.
Crowdfunding tremendously changed the investment landscape. By all indications, crowdfunding will further strengthen it. From a mere curiosity-inducing idea, the phenomenon now reigns in praxis and has transformed the industries into huge communities of success-driven investments.
Becoming embraced by so many is an astonishing feat for crowdfunding. And, as it’s now in the dictionary, ‘crowdfunding’ is no longer just a buzzword — it is being used to great effect in the real world.
David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity advisory firm, andThe Soho Loft – The Voice of Capital Formation – a global financial media company with divisions in Corporate Communications, Publishing and Expos & Events. You can reach him directly at David@LDJCapital.com.