In 1876, when the New York City government refused to finance the construction of the Statue of Liberty’s pedestal, US citizens sought to raise the funds collectively. Meetings were held. Theatre performances, art auctions and prizefights staged. Joseph Pulitzer, then editor of New York daily The World, developed a fund prize, offering to print the name of each donor who contributed. Millions of donations from across the country poured in, including one $1.35 donation from a kindergarten class in Iowa.
Crowdfunding is the collaborative economy at work in the financial world. It relies on the collective co-operation of the ‘crowd’ to pool funds, usually through intermediary web-enabled platforms.
The internet means that in modern crowdfunding, crowds arise from existing online communities or can suddenly appear from seemingly disparate or geographically distant groups. Crowdfunding allows small-to-medium enterprises (SMEs) to transform their ‘social capital’ into ‘financial capital’, bridging the equity gap in access to early-stage financing for entrepreneurial, artistic or cause-based projects.
As research conducted by the World Bank’s information and reporting agency infoDev indicates, the developing world has the potential to ‘leapfrog’ the developed world in its uptake of the crowdfunding model.
The National Bureau of Economic Research (NBER) in the US has highlighted how crowdfunding diminishes geographic boundaries: the average distance between project creators and investors is 4,830 kilometres. Crowdfunding undermines the necessity of ‘localness’ of traditional micro-lending practices, and breaks conventional funding cycles.
Although nonprofits have long used online platforms to fundraise, donation-based crowdfunding can increase the amounts donated by individuals because it targets contributions to specific projects with measurable objectives. Motivation is key in connecting investors with the projects they support: up to 30 per cent of crowdfunding projects target social causes.
The crowdfunding model also democratizes access to early-stage capital for SMEs. It lowers costs and barriers to entry, and fosters greater inclusivity in markets. According to the World Bank’s report, in sub-Saharan Africa the number of crowdfunding platforms has doubled every year for the past three years. In South America, the number of platforms has grown from 5 to 41 since 2010. Early success and rapid uptake of crowdfunding has also occurred in the Middle East and in Asia.
In the developing world, increasing access to the internet and participation in social media networks should extend the reach of crowdfunding platforms. Similarly, collaborative spaces or events, such as hubs, networking events, incubators, accelerators and competitions for entrepreneurial ventures add a physical and personable side to crowdfunding ventures. These could build trust and increase the likely success of platforms and projects.
With governments in the developed world increasingly seeking to regulate in order to facilitate the expansion of the industry, international organizations such as the Organization for Economic Co-operation and Development (OECD) have a key role to play in providing analysis and policy guidelines for developing nations seeking to follow suit.
A report by Forbes estimated that financing from crowdfunding platforms could potentially surpass $1 trillion by 2020. Though crowdfunding undoubtedly has the potential to democratize access to capital, it remains unclear whether the model will solidify itself as a long-term sustainable method for early-stage financing SMEs in the developing world.
The crowdfunding revolution is democratizing financing across Europe, North America and in Australia. Yet providing greater equity in financing of our own SMEs is not enough. This expertise needs to be extended to the developing world. That really would be reaching out to the crowd.
Nicola Bauman is a student at The University of Sydney’s Faculty of Arts & Social Sciences and was a Global Voices Delegate to the OECD Forum in May this year.