On Creativeness and Why Crowdfunding Has Surpassed the VC industry

For the first time in a digital and human history, a film funded by the people (a.k.a. crowd) has won an Oscar. Inocente had the help of 294 backers who donated over $52K in total via Kickstarter, the leading crowdfunding platform which utilizes contribution (donation) model. The beautifully done story is truly moving and got me into tears when I watched it at the Films Academy screening here in Los Angeles.

But this was just one out of almost twenty thousand projects of 2012 which their creators were able to get off the ground — thanks to the financial support from the online communities. Kickstarter reveals some enlightening data and information on the best funded projects of 2012 such as:

• 10 percent of the films at Sundance were Kickstarter-funded;
• 63 Kickstarter-funded films played in more than 1,200 theaters;
• Crowdfunded opera premiered at the Kennedy Center;
• A Kickstarter funded open-source underwater robot for exploration and education “could change the future of ocean exploration.” (New York Times)
• Kickstarter become the second largest publisher of graphic novels;
• Kickstarter funded festival in Portland, Oregon united artists, creators, and technologists to celebrate disruptive creativity.
• Kickstarter-funded journalists reported from dozens of countries including Sudan, Libya, Nicaragua and Sri Lanka.

Out of 13 categories listed on Kickstarter, Games had the most money pledged at $83 million, followed by the Film at $57 million, Design at $50 million, Music at $34 million and Technology at $29 million. Music, Film, Art, Publishing, and Theater each had more than 1,000 funded projects. Average donation per backer is $75.

For some time I’ve been baffled with the question — why people, most of whom have seen worsening their financial situation, would want to donate any money via crowdfunding these days? As equity crowdfunding is pending an approval from the SEC and is still illegal in the U.S., the backers know right upfront they are not entitled to any profit sharing. They also recognize that their names as donors will hardly receive any public attention. In short, the current donation based crowdfunding model lacks the two great market incentives – profit and recognition. Still, Kickstarter reports that 2.2million people have pleaded their money in 2012. Why?

The answer has arrived in the bizarre flash of a second one day as if I went to the top of a mountain and spoke to the “Source.” Altruism, just like a self-interest, plays an important, if not crucial part in the modern capitalistic system.

Please don’t go Ayn Rand on me, but look at the following numbers: the total giving to charitable organizations is ten times bigger than, for example, venture capital investments — $298.42 billon versus $28.7 billion (2011 data). Sorry if this sounds too much of a cliché, but based on the numerous studies I had to go through, most people get involved to the charities in order to feel they make a difference for the cases they care about. While tax benefits help, they are not plying a critical part in a decision making process.

Similar to philanthropy, our compassion, empowered by the technology and connectivity the world has ever known, takes us to the crowdfunding engine and ties it to its heart — creativity. According to the Kickstarter’s data, there was $274 billion collected last year (+238 percent from 2011). In comparison, VC’s invested $26.5 billion in 2012 (-10 percent from 2011). Do you see the difference?

To me the trend above is a strong evidence that we are all living in the paradox marketplace. On the one hand, a lot of us are keen to unleash creativity in the context of an artistic power, self-actualization and recognition (think Maslov’s pyramid). Yet, our craving for creativity and originality can be hardly commercialized: 21st century predicament is that markets still respond only to “demand” lead by Adam Smith’s “invisible hand.”

But artists and innovators don’t produce what markets want. They produce and make markets to want it — as if they would follow Henry Ford’s infamous approach who is believed to say once, “If I had asked people what they wanted, they would have said faster horses.”

To calculate the demand for early stage projects is hard; the lack of a clear demand for the creative projects particularly bloat the investments risks. Consequently, to raise a capital for any type of artistic project in a traditional way has become practically impossible. I’ve heard a brilliant George Clooney admitting that he had to pitch his film March to the formal investors for months and ultimately had to back it up himself (by the way, a truly remarkable film — highly recommend to watch of you still haven’t).

Hence, I see in a very near future the online crowd is turning to be the catalyst for practically every project or venture that requires seed capital moving it from a “limited edition” to a mass-market. Saying that, I don’t believe and don’t think that the industry should be “one company” only. Evidently, we all love Kickstarter that has currently 86 million unique users, but I believe eventually people will be moving more to the niche platforms which are already popping up. I suggest to check Crowdsunite.com that categorizes existing platforms and allows users to filter, sort, and compare them.

We also need to push forward the equity crowdfunding model. We all recognize that most of wealth in this country has been created from the investment income, not labor hours. Still, most bankers and lawyers say they don’t want “the crowd” to get involved. Who else do they think is available? The projects that are being crowdfunded are the projects that had no chance to get financed by any formal investor otherwise!

Overall, I really hope we can push the boundary of crowdfunding faster and further. It has been inspiring to watch “Inocente” which without the crowdfunders I would have not seen otherwise. And I am thinking how many other potentially great “products” we might be missing…

Source: HUFF Post – Victoria Silchenko

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