By Xu Qifei
| It might be hard to believe that a grassroots concept like crowdfunding is becoming so enormous. It raised $5.1 billion in 2013 alone and it is projected to eventually bring $65 billion and 270,000 jobs into the global economy. But beyond its growing size, what is more exciting about crowdfunding is the types of businesses it incentivizes. The interesting mechanisms of crowdfunding might just make it the fresh new blood we need that fuels the maker movement, technological innovations, responsible new media and every other piece of the sustainable economy puzzle.
Crowdfunding as the investor/distributor for the maker movement:
In a common crowdfunding project, the project developers will set a series of rewards for donators or “backers”. More often than not one of these rewards will be the final product if the project is successfully funded, and backers get more valuable rewards the more they donate. This mechanism is especially important for the maker movement. At this stage the maker movement consists of mostly niche and unique designer products that don’t necessarily have a sizable potential market but fit the specific need of plenty of people exactly. Before crowdfunding, these products rarely have any chance to hit the market, because even if any investor believes that the demand for such niche product is out there, the cost of distribution, marketing and logistics usually makes them unprofitable projects. With crowdfunding, this is not the case anymore, as these crowdfunding websites act as the middleman connecting the potential users/consumers directly to the developers. By taking away the cost of distribution, it saves huge amount of cost for makers and consumers.
Crowdfunding as market research for innovation:
It is truly curious how grassroots funding supported cutting edge technological innovations. Popular smart watches, virtual reality devices and web 3.0 programming platforms are all products of crowdfunding. It even brought us new ideas of sustainable technology like solar roads, sustainable herbs and many others. Why has crowdfunding become a breeding field of innovations? The secret lies in its market research capabilities.
If you want to estimate how many people will buy your product, there is no better way than testing the water by actually trying to sell it. Crowdfunding allow you to do just that. Conducting market research used to be very unlikely for any starting companies as they have virtually no useful or relevant database, and this is especially true for companies trying to create innovative products. Now however, the “goal” mechanics of some crowdfunding websites allow small starting companies to do reliable market researches and adjust based on the results without any unnecessary investment. Crowdfunding websites require project developers to set goals of funding for the project. Only when the total amount of donation reaches the basic goal of funding can the developers actually obtain the crowdfunding donations. Developers can also set up “stretch goals”, so that with the total amount of donation reaching each of these stretch goals, the developers provide different more options of the products, add in new features or make some other kind of improvement. These mechanisms allow potential consumers or users to see the product prototypes and purchase the products before they are produced, which gives small starting companies the most dependable market research tool there is.
Such market research capabilities have two significant advantages for both innovative new companies and the market in general. First of all, it reduces the risks for innovations. When scientists, designers, programmers and content creators have fresh new ideas, instead of scratching their heads and failing to show their investors why such new ideas are worth the risks, they can just verify if there is an existing market themselves. Second of all, it eliminates large amount of excess in production, which would otherwise be a huge burden for these independent project developers or small starting businesses. Now in the initial manufacturing stage of the products, these independent project developers or small starting businesses may not have to produce much more than what they can sell, if at all. It helps these developers to run on tight budgets, and it reduces the waste problems of our society.
Crowdfunding as people’s voice in new media:
Crowdfunding can even be used to create politically responsible new media. Independent political new media haven’t really been seriously looked at as a solution to our mass media problems, as they usually don’t have reliable sources of income for investigative journalism, and therefore often end up committing tabloid journalism or cheap click-baits. However, crowdfunding might change all that here. With the existence of subscription-based crowdfunding sites like Patreon, where all the users donate a monthly fee to content creators, we can actually for once picture independent new media personalities to have reliable revenue. Furthermore, media consumers in this case can actually hold these content creators accountable, and the monetary support keeps these content creators away from cheap click-baits and incentivizes them to make substantial, desirable and responsible content.
Although currently these crowdfunding mechanisms are used largely for entertainment purposes, we are already seeing signs of the emergence of serious political new media. In 2012 already there were personalities like Anita Sarkeesian raising $440,000 by crowdfunding and moving on to make in-depth videos on the topic of the representation of women in popular media and video games. One of the most successful Patreon campaign is done by Tom Meritt for a daily tech news show, raising over $16,000 per month. We are also witnessing emerging podcasts on political matters and news making hundreds of dollars per months.
Crowdfunding is not yet a mature system, as the laws surrounding consumer protection in crowdfunding are in their infancy stage and quite flawed. However, as we are seeing Washington State Attorney Bob Ferguson filing consumer protection lawsuit against “crowdfunding theft”, we might see precedents and legislature putting consumer protection mechanisms in place very soon. When crowdfunding hits its prime and the related industries start booming, it will be an exhilarating time for us all.