On November 20, an American company called Cloud Imperium Games successfully completed two funding requests. The company needed support for a PC game it wanted to develop called Star Citizen. The money raised from these two requests amounted to over $6.2 million.
Crowd funding enables requests to be made to the public- Anna Maria Darmanin
A software firm raising several million dollars to create a new game is not unusual. What is unusual is that the company received the funding from more than 55,000 backers. To come up with the cash, they turned to crowd funding.
The first known case of a crowd funding project was for a music tour in 1997. Since then, the idea has become markedly more popular. In a world of bank liquidity problems and government spending cuts, small businesses have had to bear a heavy burden. This might not be quite so serious if European economies were not in such severe need of growth. There is much debate about whether austerity is the solution to the euro area’s woes. However, there seems to be little doubt among economists about the need for many more high-growth companies able to generate profits, jobs and tax revenue.
For entrepreneurs with an idea, it is not obvious where funds can be raised. Banks are afraid to lend money in the current climate and often require more security against the loan than that available to the typical bright young person. Business angels are important, but Europe needs more of them and it is not always easy for an entrepreneur to get access to them.
Venture capital is typically reserved for companies with some traction, that might need €1 million to €3 million, and which have an IPO in their sights.
In contrast, crowd funding enables requests to be made to the public – or at least the internet-using public. It is for this reason that Cloud Imperium Games were able to tap tens of thousands of investors. Clearly, the average transaction size was not large, but the total raised was. They raised over $2 million from a platform called Kickstarter.
Just as the internet has flattened structures in other business sectors, such as stock broking and publishing, crowd funding is a potential threat to the venture capital industry. The only difference is that VCs invest with the intention of a spectacular return, whereas the crowd invests because they would like to see a project become real.
Think of it as a democratisation of small-scale start-up capital. There are many crowd funding websites, with Kickstarter almost certainly the leader among them. Other important players in the sector include Indiegogo, Rock the Post and Gambitious.
Each of these sites has something of a niche. Gambitious, for example, was launched in the Netherlands and focuses on funding for computer games, while Rock the Post focuses on legitimate revenue-generating businesses and rejects the majority of the requests it receives.
These sites work on an all-or-nothing basis. If a project is not fully funded, it receives none of the money. If, however, the project is fully funded, the platform takes a small percentage as a fee from the total transaction amount. What is certain is that tech-savvy entrepreneurs can reach a wide audience via social media and their own networks and raise the few thousand they might need to get their project or business idea off the ground.
Needless to say, there are potential problems with crowd financing a project. The first and most obvious is that the entrepreneur is exposing his or her idea to the world at a very early stage, enabling others to copy it.
Legal protection is not offered by the platforms, and without patents and copyrights there may be no legal protection at all. For artistic ventures, this is less of a potential problem since the money will typically enable the creative project to begin. As I investigate this area of online business, something that stands out is the lack of a European platform. Kickstarter, for example, currently only allows projects from either the US or the UK.
While that makes sense for a company based in New York, it is not particularly helpful for entrepreneurs based in Spain, Ireland or Malta. Considering the European Single Market and the fledgling Digital Single Market, this is an idea that could be very helpful across the entire EU.
There are options as to how such sites could operate, either nationally or across the EU. This is the kind of project that would require sensible rules but not be overly burdened by additional layers of bureaucracy.
If ever there were an idea that it would be useful for governments to fund and then allow entrepreneurs to make the best use of it they can, this would seem to be it.
It is an idea we Europeans need to embrace if we want to enable the bright, ambitious and hard-working people with good ideas among us to flourish now and in the future.
Anna Maria Darmanin is vice-president of the European Economic and Social Committee.