Crowd­fund­ing

Crowd­fund­ing enables projects to be fulfilled without having to attract well-known investors. Instead, a large number of in­ter­est­ed parties and fans finance the project directly e.g. through donations and loans. Crowd­fund­ing is a rel­a­tive­ly young concept that began in 2008 when Indiegogo was founded, then Kick­starter.com the year after. Since then, many well-known projects have been realized with the help of crowd­fund­ing, including cryp­tocur­ren­cies, music albums, software projects, video games, and in­no­v­a­tive items for everyday use.

Crowd­fund­ing focuses on at­trac­tive and effective marketing to appeal to private investors. Because this form of financing is based on trust, the promise to potential donors mustn’t be too un­re­al­is­tic, but at the same time it has to be inviting so that donors are prepared to invest in a project that has not yet been im­ple­ment­ed. Therefore, trans­paren­cy is crucial when it comes to crowd­fund­ing. By keeping your donors up to date with the latest de­vel­op­ments in your project, you strength­en the re­la­tion­ship and trust of your donor base on the one hand, and gain new donors on the other hand. In addition, other people will see that you are actually doing a promising job and will be more willing to donate.

Crowd­fund­ing often has a snowball effect – the most suc­cess­ful projects can end up going viral on social networks. Sometimes this even results in so much hype that the goal is quickly reached and even surpassed. This isn’t always going to be the case, however. Nev­er­the­less, crowd­fund­ing projects often attract an as­ton­ish­ing number of voluntary donors. Most platforms show the amount of money that’s already been collected. By defining a financial goal, the donor base can always track the success of the crowd­fund­ing campaign. So-called mile­stones can also be defined: the more money that’s collected, the more promises can be made about the end product. These mile­stones are often placed above the financing target so that the project reaches a larger scope than orig­i­nal­ly planned.

In addition, as the project leader you can reward your donors according to how high their donation is. It’s not unusual to make certain promises to more generous donors e.g. a free copy of your product when it’s finished, a premium version, a mention in the “credits,” special mer­chan­dise, admission to a special “VIP club,” and much more. Donors often receive a certain thank you for their donation before the project gets fully underway.

The four main crowd­fund­ing models differ according to what the donors receive in return for their donations. The type of cash flow also plays a role. There are still no clearly defined terms for the names of the models, because these types of crowd­fund­ing have emerged in a practical way in recent years. The bound­aries between the models are often blurred: in the course of a campaign, pure donation crowd­fund­ing can sometimes merge into the classic, reward-based model.

Example: A small de­vel­op­ment team is working on a concept for a new, in­no­v­a­tive video game. Because the team can’t find any suitable business partners or investors, it has decided to try its luck with crowd­fund­ing. By promising to have the game finished within the year, the de­vel­op­ers ask for support in the region of $50,000. All donors will be thanked with a mention in the credits at the end of the game. If a donor gives more than $50, they get a t-shirt, and if they give more than $100, they are promised access to the game’s beta test phase. To lure par­tic­u­lar­ly generous investors, the de­vel­op­ers promise to feature the donor as one of the figures in the game if over $500 is pledged.

Example: A young startup company sells an en­vi­ron­men­tal­ly-friendly soft drink locally, which is par­tic­u­lar­ly popular among young customers. The company wants to expand across the US and com­mer­cial­ize the beverage. For this reason, it launches a crowd­fund­ing campaign and promises investors a share of the sub­se­quent profit, depending on the in­vest­ment made. From a certain amount onwards, the investor is also promised a monthly beverage sub­scrip­tion.

Example: A startup company wants to invest in a new project, but lacks the funds to do so. The bank won’t provide a loan, since there’s a required equity quote of at least 30%. The startup starts a crowd­fund­ing campaign and promises investors that they will repay the loan amount at an interest rate of 5% after two years at the latest. Within a few months, the necessary capital will be reached, so the bank can now also get on board. Work on the project can begin.

Im­pres­sive projects have already been im­ple­ment­ed thanks to crowd­fund­ing, but on the other hand, there have also been numerous dis­ap­point­ments, some of which have caused a lot of damage. Crowd­fund­ing is not a miracle cure for project financing and requires a lot of work and also ingenuity on the project de­vel­op­ers’ side. Suc­cess­ful crowd­fund­ing is based on many factors in­ter­act­ing. You should:

• Stay realistic. Both the project planning and the financing target must be re­al­is­ti­cal­ly defined – and these depend on many factors. You should not ask for more money than is needed in your industry and make sure the amount is suited to the size of your project. Com­pre­hen­sive finance planning is in­dis­pens­able to set the most realistic goal possible. Only when you know what the project will cost you, will you be able to give your donors a credible funding target. The project de­scrip­tion itself shouldn’t be too excessive: if you promise too much, you won’t be taken seriously. Crowd­fund­ing donors have become more skeptical in recent years due to being left dis­ap­point­ed in the past. So make sure the skeptics have nothing to doubt.
  
  
• Stay trans­par­ent. It’s important to keep com­mu­ni­cat­ing with your donor base to maintain con­fi­dence in your project. Ideally, regular updates are used to signal that things are actually happening. This also increases the prob­a­bil­i­ty of your project at­tract­ing more attention and also more donors. Finally, it motivates the donor base if they see that the donations have made a dif­fer­ence. Donors who have already been won over are more likely to provide further support. Main­tain­ing com­mu­ni­ca­tion between you (or your team) and donors and actively con­tribut­ing will help in achieving the funding goal for your project.
  
  
• Appear competent, but remain ap­proach­able. The content you share should be as pro­fes­sion­al as possible. Videos and images shouldn’t look am­a­teur­ish and texts should be free of typos. At the same time, however, it’s important to stay ap­proach­able for your donor base. This also depends on the target group: for example, you can be more relaxed about a video game project than a software project that is mainly aimed at companies. The right balance is crucial here in order to have a sym­pa­thet­ic effect on donors. Many of the unwritten rules of online marketing also apply to crowd­fund­ing.
  
  
• Keep your promises. If you reward donors for pledging certain amounts, you should stick to your promise. This strength­ens your re­la­tion­ship and increases the chance of them wanting to advertise your project. Ideally, you should define rewards and promises that you can deliver or implement as quickly as possible. A popular reward for donors is mer­chan­dise such as t-shirts and caps, as these are produced rel­a­tive­ly quickly. Including a project logo means that articles can be used for effective ad­ver­tis­ing. Be sure to keep your promises regarding updates on your project. For example, if you are an­nounc­ing a weekly blog post about the status of your project, you should deliver this on time. It doesn’t do any harm to show some progress with tweets and Instagram posts in between.

Among the most suc­cess­ful crowd­fund­ing campaigns are numerous blockchain/crypto projects. Filecoin from Protocol Labs is an ap­pli­ca­tion for de­cen­tral­ized data storage and enables a digital payment process based on blockchain tech­nol­o­gy. With ap­prox­i­mate­ly 257 million US dollars, Filecoin is the most fi­nan­cial­ly-suc­cess­ful crowd­fund­ing project to date. This is followed by the Tezos (232 million) and EOS (185 million) projects, which are also related to blockchain.

However, the term “crowd­fund­ing“ is disputed in many of these campaigns. They are within the spec­u­la­tive bubble of the cryp­tocur­ren­cies, meaning that con­trib­u­tors usually receive “only” a certain amount of the re­spec­tive cryp­tocur­ren­cy as equiv­a­lent. Instead of de­vel­op­ing a certain self-interest and en­thu­si­asm for a project, donors usually speculate on the success of these campaigns, which is fed by the general hype sur­round­ing cryp­tocur­ren­cies. This is why crowd­fund­ing campaigns regarding blockchain and cryp­tocur­ren­cy are more like stock market spec­u­la­tion. The fact is: the crowd­in­vest­ing model seems to be the ideal breeding ground for cryp­tocur­ren­cies.

Crowd­fund­ing has a con­sid­er­able influence on the video game industry and has already helped many in­de­pen­dent de­vel­op­ers realize their projects. The mega video game project Star Citizen ranks fourth behind the three blockchain projects mentioned above. To date, the game has collected around 180 million US dollars, clearly setting itself apart from the com­pe­ti­tion. Star Citizen is a kind of space sandbox game that promises players unlimited freedom and combines several popular video game genres. The crowd­fund­ing campaign for Kick­starter was extremely suc­cess­ful and helped the project generate hype online.

However, the project generated the most revenue by selling in­di­vid­ual content for the upcoming game. Depending on the amount trans­ferred, donors can “pre-order” space­ships, objects, and prop­er­ties in the game. The crazy amounts helped Star Citizen to gain even more fame when people realized some four- and five-figure donations had been made. These donors hoped to enjoy certain ad­van­tages when the game was released. This also resulted in a cor­re­spond­ing media response. This means that a lot of pressure is put on the project to deliver the promised quality and scope. Donors have to be patient: targeted release dates and mile­stones may need to be postponed several times by the de­vel­op­ers.

In contrast to Star Citizen, min­i­mal­ism is key for the cult role-playing game Undertale by Toby Fox. The Kick­starter campaign was initially small with a financing target of 10,000 US dollars. However, the developer managed to make more than $50,000. The end product ended up exceeding all ex­pec­ta­tions and became a cult hit and one of the most suc­cess­ful indie video games of all time. It won numerous awards including “Game of the Year” from The Jimqui­si­tion and Zero Punc­tu­a­tion, and the SXSW Gaming Awards named it the “Most Ful­fill­ing Crowd­fund­ed Game.”

Undertale, whose retro aes­thet­ics are rem­i­nis­cent of games from the 1990s, was Toby Fox’s personal project for the most part. The game is rather un­con­ven­tion­al when it comes to its story, humor, and gameplay. It achieved im­pres­sive sales figures and was later ported to PlaySta­tion 4, PlaySta­tion Vita, and Nintendo Switch. An inspiring success story, which was made possible by a rel­a­tive­ly small crowd­fund­ing campaign that allegedly made Toby Fox a mil­lion­aire.

The Flow Hive is an in­no­v­a­tive beehive that allows bee­keep­ers to au­to­mat­i­cal­ly extract honey without dis­turb­ing the bee colony. This makes the classic honey extractor su­per­flu­ous. The project raised ap­prox­i­mate­ly 13 million US dollars and by March 2018 around 50,000 Flow Hives had already been delivered. Flow Hive is the most suc­cess­ful project financed by the Indiegogo platform. In addition, Flow Hive has been further developed after receiving some criticism, so now a second version is available. The suc­cess­ful project generated a lot of attention on social networks and in the media, and many people started to take up bee­keep­ing as a hobby.

First­Blood gives gamers from all over the world the chance to compete against each other on a de­cen­tral­ized platform. First­Blood aims to rev­o­lu­tion­ize the young and still largely in­ef­fi­cient field of eSports. In­no­v­a­tive is the own reward system, which works similarly to a cryp­tocur­ren­cy via blockchain tech­nol­o­gy. In addition, members can use this currency to invest in the game, players, and teams, and take on certain roles in the community e.g. as a “jury member” and “witness,” which is then rewarded with virtual money. The idea was born: within just a few minutes, around 5 million US dollars were collected, with cryp­tocur­ren­cy being provided in return, depending on the amount donated. In addition, investors received a 70% discount on the currency within the first hour of the campaign.

Crowd­fund­ing has become very popular over the years, the abundance of available platforms alone speaks for itself. However, in addition to the in­no­v­a­tive and in­ter­est­ing projects, there are also numerous nonsense and con­tro­ver­sial campaigns, some of which have been mocked by the online community.

A more harmless example can be found with project manager Zack Danger Brown, who only asked for 10 dollars to make his first potato salad. The 55,000 dollars he collected probably helped make his potato salad dreams come true. It should also be said that Brown actually donated most of the money to an aid or­ga­ni­za­tion.

Rapper B.o.B., a self-confessed flat earther, left a lot of people scratch­ing their heads. On his GoFundMe page, he wanted to collect 200,000 then later 1 million US dollars to send a satellite into space. His plan was to pho­to­graph the “edge of the world” and prove that the Earth is, in fact, flat. Until now, B.o.B. has only been able to collect 7,000 US dollars, but he has caused a media frenzy. In any case, the question is whether these types of crowd­fund­ing projects are actually just clever PR campaigns in disguise.

Crowd­fund­ing platforms are full of ques­tion­able campaigns that often make you wonder if they are serious. Some want money for their wedding or honeymoon, others for a tattoo…etc. Many use the platform for political reasons, which are sometimes even racist. The websites aren’t protected from trolls who just use them to let off steam. While many projects remain unnoticed and un­fi­nanced, many ludicrous and downright ridicu­lous campaigns do attract social media attention. This is another reason why the crowd­fund­ing concept is re­peat­ed­ly exposed to criticism, as many come there to ridicule the campaigns on there. Funny crowd­fund­ing campaigns are now con­sid­ered an integral part of meme culture.

Elio Motors’ concept of an en­vi­ron­men­tal­ly-friendly and eco­nom­i­cal car with three wheels was well received by investors. About 6,000 in­di­vid­ual donors supported the project by pledging around 100 million US dollars, which far exceeded their own goals. The crowd­fund­ing campaign was very suc­cess­ful – but the result is yet to come. Elio Motors orig­i­nal­ly wanted to launch the first version of its in­no­v­a­tive vehicle as early as 2012, but to this day still hasn’t managed to do so. According to the latest data, pro­duc­tion is scheduled to start in 2019. Either way, the delivery promise has not been kept so far and investors must continue to be patient. Nev­er­the­less, thanks to the effective campaign, huge sums of money have already flowed in. It is unclear where this money has gone: by the end of 2016, Elio Motors’ debts allegedly amounted to over 100 million US dollars.

The video game Mighty No. 9 from Comcept, which was financed by Kick­starter, promised to be similar to the popular “Mega Man” classics and won people over due to nostalgia. The campaign, which features renowned de­vel­op­ers, generated almost 4 million US dollars, which made sup­port­ers and fans of the project op­ti­mistic. However, the release of the game had to be postponed several times until it finally came onto the market for several platforms in 2017. The game was slammed by fans and critics, since the quality was quite average and didn’t live up to ex­pec­ta­tions. To the annoyance of investors, the rewards (mainly digital) were poorly managed: some bonus codes were faulty and incorrect rewards were sent out. Some donors, who had pre-ordered, never even received the finished product.

Mighty No. 9 has certainly made people vary of crowd­fund­ing for video games, since the initial euphoria might not nec­es­sar­i­ly lead to success in the end. In general, this project shows how hype and counter-hype work in crowd­fund­ing, and how a community (that is formed around a project) can react with so much dis­ap­point­ment when promises aren’t fulfilled.