A simple explanation of crowdfunding (a.k.a. crowdsourcing) according to Wikipedia is “is the practice of funding a project or venture by raising money from a large number of people, typically via the internet.” The concept is nothing new and the way people and businesses are using it are always changing. Since the concept has been around for quite a while there are now hundreds of crowdfunding platforms in existence.
What is Crowdfunding?
Think of it as financing for the underdog, providing funds to those unlikely to qualify for traditional loans. Often used for starting up (or shoring up) small, family owned businesses, some crowdfunding supports trendy, popular, or even ridiculous ventures. Equity crowdfunding, a favorite of start-ups, provides investors with partial ownership in a venture. Reward-based crowdfunding promises no compensation, but oftentimes, neat “rewards” are dangled as incentives to donate like a free product after launch or free service once the platform is functioning. Of course this is determined by the future success and solvency of the company needing funding.
This funding option is possible only because of the “Jumpstart Our Business Startup Act” of 2012, which simplified the process of procuring investors in an open market.
Crowdfunding makes many things possible, from the ridiculous to the sublime. It even provided the resources to purchase a pedestal for the Statue of Liberty (a gift from the people of France), raising more than 125,000 contributions of a dollar or less. The internet made modern crowdfunding take off. One early crowdfunding success was ArtistShare, started in 2003 as a site where artists asked for fan donations to record their music.
Now, crowdfunding is everywhere. Forbes list of the most successful crowdfunding business campaigns:
- Pebble E-Paper Watch, $10,266,845 in 37 days for fitness smart watch creation
- Ouya, $8.5 million in 29 days for open-source game console development
- Pono Music, $6 million raised in 30 days for a high-resolution music player
- Bitvore, $4,500,000, for development of software to monitor and analyze continuous data streams
- The Dash, $3,390,551 in 50 days for wireless in-ear headphone development
In almost every case, the investors received a product upon completion of the funding and production process.
Questionable CrowdSourcing Efforts
Anyone who watched Breaking Bad remembers Walt Jr.’s online campaign to raise funds to pay for his cancer-stricken, methamphetamine-making father, Walter White. While plenty of legitimate crowdfunding campaigns have assisted individuals through illnesses and raised money for humanitarian relief causes, not all are started with honorable intentions.
Wondering about the not-so-sublime crowdfunding projects? Here is a short list, courtesy of Mandatory.com:
- An LA comedian’s “ridiculous cloud project” seeking to create an airplane cloud message asking, “How do I land?” raised over $6000
- £4,900 to create an inflatable bust of Lionel Ritchie
- Close to $9000 raised for a census of the Eastern gray squirrel in Inman Park in Atlanta, Georgia
- Over $500,000 for producing the “Bug-A-Salt” bug-killing, salt-shooting shotgun.
Of course, all those pale in comparison to the Kickstarter campaign to make potato salad, which with a fundraising goal of $10.00 ended up bringing in over $55,000. Sometimes the ridiculous is sublime.
Crowdfunding and Insurance
Securing this type of funding can be a great venture to gain financial support for a worthy cause. Because crowdfunding transfers money from one party to another, it can also dredge up some less than stellar projects or people but most campaigns help others in who’ve been caught in unfortunate circumstances. These two scenarios have made it ripe for specialty insurance in order to protect the interests of those producing or investing in the cause or product.
As with anything new there are growing pains. In the beginning, crowdfunding was a simple concept but as time passed, many of its liabilities surfaced with respect to protections for investors against insolvency and other common business cases. Companies like Tennant, offer insurance for these efforts in the form of Professional Liability coverage that includes E&O, D&O, EPL, cyber risk, and other protections.
As mentioned previously though, not all efforts to secure money need to be on the defensive. The nature of the current health care landscape and increasing costs, crowdfunding has neatly positioned itself as a tool for individuals to cover health care costs as well. According to a recent TIME.com article on crowdfunding and insurance, “Nearly two million people a year file bankruptcy due to unpaid medical bills, making health care costs the No. 1 cause of bankruptcy in the United States.” John Adsit, an officer of the Denver police department who was critically injured as he escorted school protesters in December used GoFundMe to secure over $78,000 for medical expenses.