Simply put, crowdfunding is a method for financing projects by raising money from a large group of individuals, i.e. “the crowd.”
Although crowdfunding has recently gained main street popularity, it actually has a long history in America and can be traced as far back as the 1700’s. In fact, the construction of the Statue of Liberty was partially crowdfunded by thousands of small donations from around the world, a campaign organized by Joseph Pulitzer using his newspaper, The New York World.
Before we dive into its history, let’s first review the two main types of crowdfunding.
Equity-based crowdfunding allows a large number of individuals to invest in a project and receive compensation, often in the form of partial ownership. Equity crowdfunding has most commonly been used to fund startups.
Equity-based crowdfunding efforts tend to be highly regulated by the Securities & Exchange Commission as they involve the selling of securities. More on the regulatory constraints around equity crowdfunding can be found here.
Donation & Rewards-Based Crowdfunding
Though equity is not distributed and donors don’t receive financial benefits directly from the success of a project, there are often rewards or perks given out. Actor Zach Braff famously offered a filmmaking symposium to anyone who donated $2,500 to his campaign to raise funding for the production of an independent film.
Rewards-based crowdfunding has become so popular that companies have emerged dedicated entirely to the fulfillment of rewards that have been promised.
The Evolution of Modern Crowdfunding
Crowdfunding has seen enormous growth with the emergence of the Internet.
Below we outline a few landmark moments that have put the space on the map:
1997: Music Fans Come Together
British rock band Marillion funds a US tour by raising nearly $60,000 via online donations from fans.
This successful campaign would lead to the creation of ArtistShare in 2000, the first platform entirely dedicated to crowdfunding.
2000: Charities See Increase from Online Fundraising
Charities begin to tap into the potential for online fundraising from the crowd. Non-profits see an uptick in fundraising from smaller, grassroots donors.
“Challenge fundraising” – the use of the Internet to “challenge” supporters to give to individual, goal-focused campaigns—also emerges, most closely resembling the way crowdfunding looks today.
2005: Microlending & Peer-to-Peer Lending Takes Hold
Kiva launches in 2005 and becomes the first platform to facilitate lending to developing areas across the world.
Today, Kiva is one of the most successful micro-lending platforms, having raised over $165 million through crowdfunding, with a 98.83% repayment rate.
2006: Crowdfunding Gets its Name
The term “crowdfunding” is coined by entrepreneur Michael Sullivan.
Sullivan uses the term to help explain the launch of his project fundavlog, a failed attempt to create an incubator for emerging video blogs and other projects.
2008: Crowdfunding Gains Momentum in the Political Fundraising World
Barack Obama’s 2008 campaign shows the world the power of the Internet to drive both fundraising and voter turnout.
By lowering the barrier to donation, campaigns start to see an increase in voter turnout—if you donate to a candidate, even just a dollar, you are far more likely to turn out on Election Day.
2009: Kickstarter Launches
Kickstarter, launches as a place for entrepreneurs to raise funds for companies and campaigns.
Kickstarter reports that $1,261,961,419 has been pledged on its site and more than 67,000 projects have been successfully funded, as of August 2014.
2010: Giving the Crowd Equity
GrowVC launches as the first-ever equity crowdfunding platform aimed at connecting startups and investors.
Since its inception, GrowVC has facilitated connections for more than 9,000 entrepreneurs, investors and experts from 200 different countries.
2012: Fundrise Introduces First Real Estate Crowdfunding Model
Co-Founders Ben and Dan Miller create Fundrise with the goal of giving everyone the opportunity to invest in and benefit from real estate development.
To date, Fundrise has given more than 20,000 members the opportunity to invest in 30+ real estate projects around the country.
2012: The JOBS Act
In 2012, President Obama signs the Jumpstart Our Business Startups (JOBS) Act into law. The JOBS Act allows for equity crowdfunding and legalizes private companies to publicly solicit funds.*
2014: Crowdfunding Potato Salad?
Beginning as a joke with an original goal of $10, Zach Danger Brown famously raises $55,492 from 6,911 backers to fund… potato salad.
What’s Next For Crowdfunding?
Now a multi-billion dollar industry, crowdfunding is just beginning to hit its stride.
While over 100 different equity crowdfunding platforms have already emerged, we believe that things are just getting started.
As the JOBS Act moves forward and intrastate crowdfunding exemptions emerge around the country, the industry will continue to grow at a faster and faster pace, sparking interest from donors, investors, and fund seekers around the world.
Stay tuned to see what happens next. It’s an exciting time to be in the crowdfunding space and Fundrise is excited to be one of the innovators driving this revolution.
* Elements of the JOBS Act have yet to be enacted.
Photo - Peter Cigliano