Monday, December 28, 2009

Crowdfunding, Microfinance, Micropatronage, Collective Action, Middlemen and the Movies

Boy, just keeping up with all the terms is a chore these days. A not so new one is crowdfunding. Wikipedia defines it: Crowd funding (sometimes called crowd financing, crowd sourced capital or "mass funding") is an approach to raising the capital required for a new project or enterprise by appealing to a group of people (figuratively, "the crowd") for contributions from one or many. When such an appeal is global it is mass funding.

Crowdfunding is a neat derivative of microfinancing, which offers financial services to poor or low-income people. It’s a form of micropatronage that is being experimented with as a funding mechanism for creative work like film projects. Micropatronage is a system in which the public directly supports the work of others by making donations through the Internet. Micropatronage differs from traditional patronage systems by allowing many "patrons" to donate small amounts, rather than a small number of patrons making larger contributions.

Crowdfunding is circumventing traditional funding mechanisms like bank loans or venture capital. Basically, it says let's see if we can get a ton of people to chip in a very small amount of money that in aggregate can help somebody to do something. Sounds like mass collaboration with our pocketbooks. And mass collaboration is a collective action. Collective action is the pursuit of a goal or set of goals by more than one person.

Very similar to sponsorship term though I think sponsorship is more applicable as a verb meaning to sponsor something. To support an event, activity, person, or organization financially or through the provision of products or services. A sponsor is the individual or group that provides the support, similar to a benefactor. Which basically means a good maker.

And since so many of us want to make good, the creation of crowd funding comes into play. One site trying to use crowdfunding to benefit film is, a collaborative way to fund ideas and fuel innovation. They act as a resource market, where visitors can watch a pitch trailer for films in varying states of production, share clips with friends (thereby creating a buzz), ‘demand’ screenings in their area and even contribute to a film’s release costs.

On IndieGoGo, projects use the fundraising, promotion and discovery tools provided to build an engaged fan base of funders. They take 9% of the money filmmakers raise themselves and deliver what? Fiscal sponsorship? An escrow account? Most fiscal sponsors charge less than 5%.

If someone managed to raise $200k, Indiegogo would take $18k. That's two days of shooting at that budget level. I can't think of many things worth two days of shooting. For $18k you could build a web site, incorporate the production, set up an escrow account (or an account that holds funds separate from the production's operating account), pay for a few decent meals for the crew, hire an extra PA, etc.

Has indiegogo helped anyone? So far the stand-out IndieGoGo success story has been the documentary Tapestries of Hope, which raised US $25,000 through the site to expose the shocking child abuse problem in Zimbabwe, where young girls are raped because of a mythological belief that virgins can cure Aids and HIV. Another film, The Lilliput, a feature based on the true story a Jewish dwarf who hid in garbage bins during the Holocaust, raised $10,000.

I've always thought that the potential for funding entrepreneurs via crowdfunding was a very powerful concept. I thought of it years ago, even before crowdfunding existed as a term.

But I'm certain that it's only a matter of time before crowdfunding overtakes angel investing and other traditional financing mechanisms as a great way to fund a new business concept.

But they are going to have challenges. If a small contribution obtained via crowdfunding is actually an equity investment or even a loan, then crowdfunding companies may soon have issues with securities laws. I forget the details but if you raise money from over a certain number of investors, you start being subject to all sorts of securities laws.

Is it a IndieGoGo a valuable tool? Depends on what type of project, I suppose. If you are looking for small amounts, it might be a good ticket item. Maybe I am shortsighted but they sound more like a finder or a middleman taking a piece of the pie like we have always done. A middleman is simply someone investors listen to — often another entrepreneur or investor. Now getting investors to listen, telling the story they want to hear, and you gotta have traction aka product testing. Investors don’t invest in businesses they invest in stories. You must start building your product and start testing it with your market before you start raising money. A story without traction is a work of fiction but then again, that’s the movies right?


  1. I also agree that funding entrepreneurs via crowdfunding is a very powerful concept. In fact, I think it can work at a larger scale too, potentially even replacing venture capital firms. I've written about the idea a few times on my blog:

  2. Great article, and nice evaluative comments on Indiegogo.

    The indie film industry is in a particularly experiemental place at the moment in terms of crowd funding, crowd sourcing, using social media, transmedia, and so on. One thing that filmmakers must do is examine not just what they want (to raise funds) but consider what the crowd wants in return for their funding. While there may be securities issues with lots of small investors, some filmmakers are doing crowd funding not as "investment" but rather crowd pays a membership fee for access to behind-the-scenes perks, or prebuys the dvd, donations, or something that won't raise such legal issues. There is more than one way to skin a cat :)