Skip to main content

What's Up Magazine

How crowd funding is revolutionizing traditional capital campaigns for entrepreneurs, philanthropy, and creative projects

May 08, 2015 12:51PM ● By Cate Reynolds

Join the Crowd, Fund the Future

How crowd funding is revolutionizing traditional capital campaigns for entrepreneurs, philanthropy, and creative projects.

By Jonathan Yates

Terrence Jackson and Ed Tomlin are checking out the competition.

Jackson, the founder of Armor & Glory, a sports apparel company and a former linebacker at the University of Oklahoma, is looking at the athletic gear in the aisles of the Modell Sports Store near the Annapolis Mall. The former captain of the University of Maryland football team, Tomlin, is with him. Both are dedicated to making Armor & Glory a player in the highly competitive athletic gear sector where companies such as Nike and Under Armor dominate. Both are looking to crowdfunding as a competitive means to raise capital for operations.

Crowdfunding, as defined by Wikipedia, is financing a venture, “…by raising monetary contributions from a large number of people, typically via the Internet.” It was a University of Maryland drop out, Brendan Iribe, who cashed in on one of the most prominent crowdfunding ventures when he sold his company, Oculus VR, a virtual reality entity, to Facebook in early 2014 for $2,001,985.00. Oculus VR owes much of its success to more than 9,500 individuals that crowdfunded the company on Kickstarter.

Crowdfunding, in one form or another, has been around for centuries. But, as with so many other information-based activities, it was the Internet that has allowed the practice to raise more than $5 billion in financing in 2013. Crowdfunding in the United States was also assisted by the 2012 JOBS Act, which allows for more investors to participate in certain ventures.

There have been many, many other crowdfunding success stories. Based in San Francisco, the creators of Soylent, a liquid nutrient drink, turned to crowdfunding for early stage capital. To attract financing, a week’s supply of the synthetic food was offered for $65. The original goal was to bring in $100,000 in crowdfunding within a month. That goal was reached within two hours.

What can be underwritten by crowdfunding is limited basically by just the imagination and the law. The mothership for crowdfunding recently landed in Jacksonville, Florida, this past April, for the OneSpark Festival—a four-day event drawing more than 240,000 visitors to 600-plus creator projects pitching for funding. On the social media front, there were 1.5 million impressions that were registered. OneSpark went international with a related event in Berlin last September.

Locally, the University of Maryland introduced Launch UMD last spring with five pilot projects seeking financing. Like OneSpark and crowdfunding overall, there have been a wide range of participants on Launch UMD. Beekeepers, choir members, engineers, and marching band members have all raised money through Launch UMD. Have expectations been met by those seeking money through Launch UMD? The Mighty Sound of Maryland, the University of Maryland’s marching band, hoped to raise $8,000; when the counting was over, it had brought in $30,330 from contributors.

At present, more than 400 crowdfunding campaigns are launched daily around the world. These take place via hundreds of crowdfunding platforms. The most prominent are Kickstarter, Indiegogo, and Crowdfunder. There are many niche crowdfunding platforms, in virtually all areas for the profit and nonprofit sectors.

The funds are raised through basically two types of campaigns: equity and reward. Equity allows for ownership if certain performance levels are reached. That resembles many existing forms of financing such as venture capital or publicly traded companies. Laws are still being implemented for equity crowdfunding as allowed by the 2012 Jobs Act.

Reward-based financing, by contrast, allows for entrepreneurs to pre-sell a product without taking on any debt or giving up any ownership interest. There is a great deal of flexibility in what can be financed. Projects have ranged from motion pictures to free software to revitalizing historic buildings in urban areas.

The amount raised through fundraising in the United States has more than tripled in recent years. In 2011, just under $1.5 billion was raised. By 2012, $2.6 billion was financed by crowdfunding. In 2013, the amount reached $5.1 billion. About a thousand dollars a minute is now raised globally through crowdfunding. Based on projections, it will continue to rise as more become adroit at initiating and managing crowdfunding campaigns.

While the money is important, there is much, much more to be gained from crowdfunding. One of the most important aspects of soliciting funding from the public, whether through crowdfunding or other forms such as venture capital or an initial public offering, is the feedback from the investment community. That is critical for helping to shape the operations of the entity in every meaning of the word. Those soliciting funding are provided with immediate feedback from both the investment sector and the consumer community. Many choose to finance projects seeking crowdfunding that they can help develop in other ways.

From that, both the pitch for crowdfunding and the product or project being considered can be refined to compete better in the marketplace. This can save a great deal of money. If no crowdfunding is acquired, it tells the entrepreneur that the project must be revised greatly. That provides immediate guidance from the market about its viability. This is a very efficient means of testing the market without an expensive consultant study or consumer focus group. It is much more cost-effective than bringing a good or service before the public; and then finding out there is no demand.

There is no doubt that crowdfunding can be the great equalizer in obtaining capital for start-up operations or expanding the activities of an entity. In this regard, it offers much more than just securing financing for goods, services, and projects that might not otherwise be financed. Crowdfunding can do much to ease income inequality around the world. Like micro-capital—financial help to individual entrepreneurs or small businesses—crowdfunding allows for the masses to access the capital markets in ways that were previously unavailable.

From that, it offers more than any government program. Crowdfunding focuses on the power of the individual. It does not have to be an entrepreneur in the traditional sense of being a risk-taking businessperson. There is little of that in a marching band or those seeking to restore a historic church downtown. Rather, it aligns the aspirations of those in a specific area with potential financial supporters from around the world. In that way the entity seeking crowdfunding benefits not only from the capital, but the investment advice and the direction of the consumer sector of the market. Launch UMD is one example of how crowdfunding utilizes this type of “power through the people.”

Another progressive example is the third annual The Great Give Anne Arundel that took place this May. The concept of The Great Give is for the community “to donate and support the causes they care most about and build awareness of the good work done by our local nonprofits,” according to the event’s website Greatgiveaac.org  Similar to how it’s organizing entity, the Community Foundation of Anne Arundel County, operates by connecting “people to causes that matter in our community,” The Great Give featured 150 participating nonprofit organizations vying for crowdfunding dollars during a 24-hour fundraising window—6 p.m., May 5th through 6 p.m. May 6th. Anyone can make a donation to any one or more of the organizations.

The Chesapeake region is one of the best suited for crowdfunding in the world for a variety of factors. Internet usage is well over 80 percent (specifically in Annapolis). It is a very affluent region, offering substantial indigenous investment capital. There is a very high concentration of engineers, scientists, health care professionals, and others with high-tech skills due to NSA, Johns Hopkins, the National Institute of Health, and other major institutions. Maryland has been a leader in so many initiatives and there is no reason that crowdfunding cannot be the next.