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Does crowdfunding work?

Posted on 28 Sep 2012 at 14:45

Is it really practical to fund a business from hundreds of small donations harvested over the internet? Simon Brew investigates

There’s a sporting chance that you’ve seen the work of Jane Espenson on your television over the past decade or so. She’s written scripts for shows such as Buffy the Vampire Slayer, Torchwood and Battlestar Galactica. Naturally, therefore, she’s worked with and befriended some people with very deep pockets.

Yet, when it came to raising funds for one of her most recent projects – a small web-based sitcom by the name of Husbands - she chose not to turn to her well-heeled contacts. For Espenson is one of a growing number of people who has turned to the idea of crowdfunding: seeking small donations from many supporters over the internet, instead of big contributions from venture capitalists, banks and such like.

Consequently, the budget for Husbands’ second season has come almost directly from its audience. In all, 956 people have donated a total of $60,000, with the smallest contribution being only $1. Impressively, it raised its budget in less than a month.

Crowdfunding is a fascinating idea, and one that’s beginning to find its feet, thanks to the rise of dedicated websites such as Kickstarter. Could it really give the banks – with their continued reluctance to lend to small businesses – some serious competition?

Who needs crowdfunding?

Let’s be honest from the outset: for the majority of businesses, crowdfunding simply won’t work. Since it requires the interest of a comparatively large number of people to fund a venture, the project itself has to have relatively wide appeal. After all, there’s something idyllic and romantic about being able to fund a film, but an educational hobby robot? That had 31% of its target when we visited its appeal page, with only 18 days left to go. Setting up a crowdfunding appeal is clearly no guarantee of success.

“You need to do your homework,” Jane Espenson told PC Pro. “Look at other projects, both successful and unsuccessful, and figure out what would make you back something. Work on the campaign video and the wording of your appeal. Find great incentives for donors and include incentives across the spectrum, from low to high amounts. And publicise the campaign.”

A viable, previously relatively untapped source of project funding has appeared

Espenson only turned to the crowdfunding model for the second season of Husbands, “so we had all of season one to use as a demonstration of what people were funding”. And if you don’t have a back catalogue of work at hand? “Find another way to demonstrate what makes your project special,” she advises.

Many have. In the past year, there’s been a substantial rise in the number of crowdfunded projects. These range from small video games costing a few hundred dollars, through to a documentary about US footballer Jay DeMerit, which has banked $223,422. Seemingly out of nowhere – although the roots of this variant of crowdfunding go back a decade in the music industry, at least – a viable, previously relatively untapped source of project funding has appeared.

However, Doug Andrews, the CFO of the Homeworking & Small Business Alliance (HSBA) wonders if the novelty factor is what’s attracting investors. “Crowdfunding sounds like something that could work brilliantly for early pioneers, but I suspect that once it becomes mainstream, it will be very difficult to get your idea found among all the other businesses vying for attention. A lot of the excitement and goodwill that’s associated with early trends will have been replaced with people asking ‘what am I going to get out of this?’”. Andrews admits that such questioning is “not necessarily a bad thing in itself”, but adds that “as a business owner, I wouldn’t want 2,000 investors dipping their oar in and trying to run my business”.