Crowdfunding: what is it and where did it come from?

WHERE DID CROWDFUNDING COME FROM?

Crowdfunding refers to a financing (funding) by a community (crowd). Its current format through online platforms is recent and it comes from some initiatives from the 2000s. However, the idea of a collective funding dates back to at least 1713, when Pope Alexander had the support of 750 investors to fulfil the task of translating and handwriting the Homer’s “Iliad” from Greek to English.

Another classic example of “crowdfunding” was in an 1885 campaign that took place in the United States that needed to raise funds to build a pedestal for the Statue of Liberty, a gift from the French to the Americans. The campaign, published by the New York World, raised contributions from more than 100,000 people from around the world, reaching its target for completion of the work.

It is evident, in this sense, that the idea behind crowdfunding is not new. However, with the internet, it was possible to revive the institute and increase its scope. In 2003, ArtistShare platform was launched in the United States, in which musicians could ask for donations from their fans to fund their musical projects, giving small gifts and rewards for those who contributed. Among other prominent platforms, it is worth punctuating the role of Indiegogo, in 2008, and of Kickstarter, launched in 2009, both that marked the history of crowdfunding. They were essential to the worldwide expansion of the institute as a means of private funding.

In fact, crowdfunding on digital platforms stems from two previous institutes: crowdsourcing and microfinance. The first concept comes from the idea of collecting small contributions from many people to fulfill a task – the focus, therefore, is on the contributor. On the other hand, microfinance or micro-lending involves lending small amounts of money, usually to borrowers with low income – the focus is on the figure of the borrower.

Giving that, it is possible to realise that crowdfunding through digital platforms is a recent phenomenon with exponential growth, that arose from a long history of initiatives.

WHAT IS CROWDFUNDING?

Crowdfunding is, historically, a human construction and, giving its special features, there have been several attempts to define it.

According to the Securities and Exchange Commission (“SEC”), for example, the term “generally refers to a financing method in which money is raised through soliciting relatively small individual investments or contributions from a large number of people”¹.The concept, in spite of its rightness, might not be comprehensive enough to give the notion of crowdfunding.

Another concept was given by Norberto Montani Martins and Pedro Miguel Bento Pereira da Silva, in the sense that:

[The] crowdfunding or collective financing directly connects, through the Internet and the social media, people that can donate, lend or invest money, with those who need this money to fund projects or business, through small contributions from a large number of individuals that, together and anonymously, form the critical mass to make them feasible².

Naturally, however, due to the dynamics of technological development and the complexity of human and trade relationships, clinging to a narrow concept of crowdfunding may prove itself unfeasible. Thus, it is recommended to be aware of new formats of this phenomenon in constant evolution.

It is noteworthy that there are several attempts to define crowdfunding, normally as a form of financing based on small contributions from a large number of people, through the Internet. However, the term shows up as a true “umbrella”, describing various formats of funding initiatives by different groups of people.

Perhaps, rather than establishing a unique concept, it is important to describe all its forms, since there is hardly a sole definition capable of covering all of them. A relevant work in the sense of explaining crowdfunding forms was made by Norberto Montani Martins and Pedro Miguel Bento Pereira da Silva, authors that, in a straightforward way, composed all these main formats:

At least eight forms can be devised, each one with its own peculiarities. All of them have in common the involvement of a risk to investors, that somehow seek a specific consideration in their investments. Such consideration can either be equity, interests, the product/service being funded or even the use of the loan for the development of products or social activities.

The above division of crowdfunding platforms, however, is not unanimous. In spite of that, such classification is the one that better details the types of crowdfunding, which is why it is deemed to be the most adequate one.

[1] Investor Bulletin: Crowdfunding for Investors (16 February 2016). Avaiable at https://www.sec.gov/oiea/investor-alerts-bulletins/ib_crowdfunding-.html. Last access on 14 July  2016.

[2] MARTINS, Norberto Montani; DA SILVA, Pedro Miguel Bento Pereira. Funcionalidade dos sistemas financeiros e o financiamento a pequenas e médias empresas: o caso do crowdfunding. Revista Economia Ensaios. Uberlândia: EdUFU. v. 29, n. especial (Associação Keynesiana Brasileira), Dez. 2014, pp. 19-20.