Crowdfunding revolutionises venture funding
Funding from the bottom up, via crowdfunding, means many expert eyes can perform due diligence on a company, says Dan Marom
Dan Marom, author of The Crowdfunding Revolution, at Open Innovation 2.0 in Dublin last week. Photograph: Conor McCabe Photography
Through its powerful ability to remove intermediaries from transactions, the internet excels at making once-bizarre ideas the norm.
Buy things directly from total strangers, send them your money and actually expect the items to arrive at your door, rather than have the seller abscond on a Caribbean holiday? Well, hello eBay.
Give money to someone online that you’ve never heard of because they want to make something that intrigues, form a company or borrow some cash?
That is the rapidly developing world of internet crowd funding, a market worth about $8 billion annually.
As unlikely as the idea initially seemed to many, it has turned out that there were – and are – millions of people willing to give money to people whom they have never met. That notion immediately intrigued an Israeli finance graduate student named Dan Marom.
In 2009, Marom was looking for a subject for his dissertation, just as the crowdfunding phenomenon began to take off. A former entrepreneur with experience in research and development, Marom began to gather datasets, look more closely at the idea and think about where crowdfunding was likely to go.
It was too early, with too little happening on the ground for the topic to make a scholarly dissertation, but it led Marom to author a co-written book (with Kevin Lawton), The Crowdfunding Revolution, one of the very first books on crowdfunding. And it was – of course – crowdfunded into publication in 2010. Mainstream publisher McGraw-Hill released a revised second edition in 2012.
“I think crowdfunding is a crucial toolkit for an entrepreneur,” he says, noting there are now more than 1,000 online sites for the activity. “It’s the democratisation of entrepreneurship.”
During an interview after giving a talk at the Innovation 2.0 conference at the Convention Centre Dublin last Thursday, Marom noted many misunderstand what crowdfunding is about.
To begin with, he said, it is not just about Kickstarter, the well-known funding platform for various projects and products that helped launch, and continues to shape, how we view internet fundraising. Kickstarter alone has raised nearly a billion dollars in the last 4½ years – “but Kickstarter is only the tip of the iceberg”.
Broader marketCrowdfunding is much broader and covers four areas, as he sees it: reward-based efforts such as the projects on Kickstarter (where donors get something in return, such as the initial run of the product or other perks); donations (an area pioneered by then presidential candidate Barack Obama); debt (peer-to-peer lending); and equity (investing in a company and receiving shares).
“Many policy makers are beginning to understand the importance of it,” he said. “It’s injecting new energies into the economy.”
It’s more than just a funding mechanism, he believes. “It’s not only about returns. It’s a social phenomenon. People feel attached.
“It is a combination of functional and emotional values. People think, ‘I want to be part of this emotional journey. I’ll get to see it happen and be a part of it’.”
Certainly, going just on anecdotal evidence and comments on various projects on fundraising sites, people do like the journey, with many willing to give modest amounts for no direct benefit except to see a product come into existence they might later buy.