Crowdfunding: what it is and why it's important

1st Jan 2013 | 12:00

Crowdfunding: what it is and why it's important

We explore the murky world of crowdfunding

Think of a crowd. Think of a mob. Think of a mass. The collective nouns for 'people' mostly come with negative connotations because, in the English language at least, such large groups are regarded apprehensively.

If a third party talks about a crowd's 'mind', then that collective intelligence is automatically levelled down, sometimes to stupidity and more often to madness (except in obscure SF or fantasy).

Think of Charles Mackay's seminal book Extraordinary Popular Delusions and the Madness of Crowds, focusing on economic bubbles and mass movements. Perhaps this fear of the crowd is a literary hang-up from ancient times, when the mob-fearing bourgeoisie and aristocracy owned the printing presses (say, before 1998 - Political Ed), or perhaps large groups of people just tend to behave in scary and antisocial ways.

Whatever the reason, we are fundamentally scared of crowds, and the main products of this fear have been theories about coping with them and avoiding them, not benefiting from them.

Yet in recent years, the crowd has been getting more and more attention. It seems that earlier fears of crowds simply played out of our limited understanding of their dynamics. Now we've found ways of utilising the crowd's processing power; now, several technologies, such as Amazon's Mechanical Turk, have allowed companies to 'crowd-source' ideas - outsourcing difficult or lengthy tasks to the crowd, which can complete them more efficiently and cheaply.

And, more importantly for us, it started crowdfunding - the use of crowds to pay for and approve projects - often creative ones.

The vast majority of crowdfunding platforms are websites that allow anyone to establish a project, set up a pitch, and establish a funding goal, allowing anyone to donate money to their idea, either philanthropically or in return for certain associated rewards.

More recently, they've combined social media technology so players can track what their friends are funding and allow projects to go truly viral. And, in doing so, it may have changed the future of game and technology development forever.

How crowdfunding started

Crowdfunding began in a curious place. There are three notable starting spots. First, there was the 1997 US Marillion tour, which was funded by fans, who raised $60,000 without the involvement of the band themselves. Second, there was the Nine Inch Nails album Ghosts I-IV, which was given away for free, with superfan-targeted versions carefully tiered by price and exclusivity.

Finally, there was ArtistShare, the first dedicated crowdfunding site, which was founded in 2000 to help artists pay for albums. The first completed project on ArtistShare won a Grammy award, and its artists have received 13 nominations since.

Like these examples, the vast majority of crowdfunded projects are entertainment. Professor Yan Chen of the University of Michigan School of Information thinks there are two reasons for this: "First, traditional funding sources for arts and humanities have been cut more drastically than other areas, such as science and engineering, in recent years. Second, the deliverables [final products] are easily evaluated by the laypeople, and thus more suitable for crowdfunding."

Andy Payne, serial games entrepreneur, says: "It's come out of bank lending and investment grinding to a halt and creative people getting tired of talking to people who don't know what they are talking about."

There are now crowdfunding platforms for pretty much every project under the sun. ArtistShare helps musicians find sponsors to let them complete pieces; Fundageek pays for technical innovation and scientific research; Fundable pays for start-up businesses; GoFundMe helps people who are recovering from health problems; Indiegogo does indie games; Loudsauce crowdfunds social awareness advertising campaigns; Mobcaster creates TV pilots; Weeve is a non-profit crowdfunding site for non-profit organisations; and Myfreeimplants.com focuses on funding for breast augmentations. We kid you not.

Getting kickstarted

Risque

The major funding platform at the moment is Kickstarter. Since it launched in April 2009, over 2.5 million people have used it to pledge over $389 million in funding for more than 74,000 creative projects. Of that, $333 million has gone to projects that met their targets and were ultimately successful.

The site has a success rate of 44 per cent, skewed down by a few projects that never get any money. Most projects have goals in the $1,000-$10,000 bracket, but 14 projects have broken a million dollars (we've listed three in the 'KickStudy' boxes around this article).

Why is it so popular? Well, part of it is the snowball effect that made World of Warcraft and Facebook the world's leading social game and network, respectively. Another factor is that Kickstarter is an all-or-nothing, no equity funding site. This means that when you set your target for funding - be that $10 or $10,000,000 - you have to raise at least that much, or you get nothing.

The 'no equity' clause means that those who pledge money via Kickstarter don't get any share of the company (unlike other platforms like Gambitious). If you help fund a project through Kickstarter, you're not guaranteed any return; if the project fails, you get nothing.

What you get if it succeeds is specified by the project creator. He or she can do this by setting up funding tiers of say $1, $5, $10 and so on. Once a donor passes a tier, he or she gets the benefits associated with that tier.

What Kickstarter doesn't allow is for users to get either a profit, or a share of the project they're funding. Over the last two years, participation in funding projects has surged to such a degree that we're predicting a hollowing out of major companies as a generation of entrepreneurs decide to go it alone.

Andrew Schrage of Money Crashers tells us: "Crowdfunding transactions were roughly $1.5 billion in 2011, with some estimates doubling that figure for this year. Some analysts say it could reach $500 billion in 2013."

The biggest success stories of crowdfunding, mainly through Kickstarter, are games and technology. For games, the watershed project was Tim Schafer's Double Fine Adventure.

Fine art

Boot hill heroes

Schafer was behind the legendary adventure games Monkey Island and Grim Fandango, and Double Fine is his studio. It used to work on projects for major publishers, typically producing AAA games that were too quirky, clever or hardcore to sell particularly well, and it was struggling badly.

Each new problem made it spiral closer to bankruptcy and the team seemed doomed. When its over-hyped Brütal Legend, a heavy metal action game starring Jack Black, was canned by Activision then failed to sell for EA, the sequel was cancelled.

Schafer sent his team away and told them to come up with lots of small games that could be sold as download-only. These all got publisher support, kept the company going and garnered critical success (and popular adulation).

But although they satisfied the team's creative itch, they didn't refill the coffers. Schafer still wanted to make a new adventure game, but no one would buy it. As his long-time collaborator Ron Gilbert (creator of Maniac Mansion) said: "I can tell you that if you even utter the words 'adventure game' in a meeting with a publisher, you can just pack up your spiffy concept art and leave."

So Schafer bypassed the publishers and set up a Kickstarter in March this year. His pitch to the What do you get when you mix spaghettie westerns with SNES RPGs? Boot Hill Heroes public was straightforward: you trust me and my company, you know we'll make something great, you can't get new, good adventure games any other way, and we only want $300,000.

Notably, he mentioned very little about the game itself. $300,000 is a tiny amount in AAA game development (the downloadable games had been working with a budget of $2 million each), but public interest was such that Schafer's project blasted past its modest goal, securing $400,000 in the first nine hours alone. By the time payments had closed a month later, the game had raised nearly $3.5 million from 87,000 backers.

This is still not a huge amount in terms of game development, but it signalled to many other developers that Kickstarter was an alternative funding spot for their games; it completed the breakdown of the publisher-distributor system that had been the bane of developers' lives since the end of Shareware in the 1980s.

With Steam Greenlight and Kickstarter, developers can now fund a game by themselves, promoting it at the same time, and then distribute it (without the fixed cost of manufacturing stock), retaining the majority of the profits for themselves.

The ball and chain

Zombie playground

"The advent of digital publishing, Steam, the App Store, Google Play and digital downloadable content everywhere is eroding the near monopoly which was traditionally held by the major publishers," says Todd Tribell, co-founder of Digital Capital, a highly specialised investment firm for cutting edge technology.

"As a result of digital downloads, the risk of maintaining $10-20 million worth of inventory one might not sell is now eliminated. Combined, the elimination of the 'ball and chain' as I call them [inventory and console licenses] is, in my opinion, the game-changer here."

Since then, we've seen many indie studios redirecting their efforts towards Kickstarter and many better-known developers leaving studios to go it alone. As Tribell says, "We are in a dynamic time in this industry and the shift has already occurred - past tense. This I attribute from a practical perspective to Harrington and Newell at Valve, and to Steve Jobs, who I believe have collectively had the biggest impact on this transformation in industry politics through the advent of download technology. The reality as I see it: I am in on the ground floor of something that is a virtually brand new industry, and I truly believe that the dynamics of the old titans in the industry are going to have to dramatically change or soon they will be gone - the same I expect to see with the console and the DVD."

Famous developers like Brian Fargo of Wasteland fame, Tim Cain of Fallout (who left his publisher-driven MMO Wildstar) and Chris Avellone of Planescape: Torment have all moved their projects to Kickstarter.

"Look at now versus three years ago," says Fargo. "How many independent studios are carving out businesses for themselves? And we all have different niches. One guy might do a fly-fishing game, or a train simulator. He's got his audience and he sells to them and he's got a great business for himself. We're already seeing a lot of really talented people leaving the publishers to do what we're doing."

Obsidian's Project Eternity hit nearly $4,000,000, again with little initial detail. Fargo's Wasteland 2 hit nearly $3,000,000. Planetary Annihilation (a modern day Total Annihilation) reached $2,300,000. Shadowrun, an old RPG series, got $1,900,000 for a 2D RPG for tablets and PC. Homestuck Adventure, an adventure game based on a popular webcomic, got $2,400,000. A new Broken Sword adventure game got funded ($700,000), despite the last iterations being disappointing. Carmageddon, a long-dead and much-beloved destruction derby game, got $625,000. Neal Stephenson, author of Cryptonomicon and The Baroque Cycle, got $500,000 to make a motion-controlled sword game. And so on.

Notably, either from the start, or in 'stretch goals' - when developers say what they'll do with all their extra cash - many of these developers have pledged to support Linux and Mac games. Given that many of them are developing in the Unity engine, they're aware that, at low cost, they can make ports to other hardware platforms relatively easily.

By making the developers realise that an unserved audience is there, desperate for games, Kickstarter is changing development. For developers, it also means that they can talk to their community about the game; for many, no part of the publishing or marketing model was working.

Tim Cain, now at Obsidian, says: "With Kickstarter, we are free to talk about the game during all the stages of its development. We have a better idea of what features are important, and the fans can follow the game's development and be more involved with it."

Kick in the teeth

Sword of Fargol

There have been high profile failures though. Wizardry lead designer Brenda Brathwaite and Doom creator Tom Hall pulled their Kickstarter for an 'old school RPG' because they felt that fans were funding it without actually knowing what it was.

It's noticeable how many games projects have focused on nostalgia rather than innovation. All the largest and most successful projects have been adventure games and RPGs - genres that have been stagnant for a long time. Worse, Haunts, a small horror game, received $28,000 from Kickstarter, but the developer had to put the project on hold indefinitely, as it had run out of money and programmers.

Given that most punters go for the cheapest option that will give them a copy of the game, the 12,000 people who funded Haunts may feel aggrieved. They thought they were pre-ordering a game, but if it shuts down then they've lost their money.

And not all Kickstarters get funded. If you're a small indie with no big names, you have to aim much lower in your goals - and be prepared to do so. Dinofarm Games' Keith Burgun has talked about the failure of the Kickstarter for his tactical dungeon-crawler Auro, emphasising the need for good communications.

Successful pitches on Kickstarter are supported by a reasonable video, regular blog updates, sensible goals and attractive payment tiers. Burgun recommends playing it straight and waiting until you've got something to show. And if you don't get the cash, don't be discouraged; work out why not and try again.

Philippe Chetrit, CEO of event crowdfunding platform Tixelated, agrees. The key to a successful campaign is a clear and precise return on a contribution, he says. "We've seen countless campaigns fail on our platform due to people's faith in a good idea."

Carlos Solorio of clothing Kickstarter Arden Reed says competition is increasing, and that "Campaigns are getting more sophisticated. Now companies going into a KS campaign are usually advised by several mentors and consultants - not to mention the professional videographers/screenwriters that have emerged from this industry."

Publishers are learning too. They won't become extinct, but they will have to change. "It's pretty scary when you're a publisher and you have to fund games because that's what you need to go ship," says Obsidian's Feargus Urquhart. "But now maybe some titles can come to you secondarily, or for distribution, or something like that where you don't have to worry about a cash outlay so much. For the $20-40 million multi-SKU console game, that's not the Kickstarter world. But for titles cheaper than that, he says: "we're getting the opportunity to go build a brand, and it's a brand that we own. And that's what changes the power a little bit."

The new wave

One interesting new platform is Gambitious, which offers the crowd equity in the project (so if the game makes a profit, the funder gets some money back) and acts like a publisher. "It's crowdfunding 2.0 - newwave publishing," explains one of the sitefs founders, Andy Payne OBE. "It's not just raising lots of money, it's making sure the project goes somewhere. We're going to have a board of experts to help developers get their pitch right, make money out of it and act as guarantors."

"Games are getting more expensive to make. When I started, apps were £50,000. Now it's £250,000. It will be up to millions on pocket computers in a couple of years. I think we'll see hybrid models - a bit of crowdsourcing to prove a concept is popular, then equity, then bigger equity coming in to take bigger slices. A hierarchical wisdom of crowds model."

It's likely that Kickstarter will adopt elements of this, especially now that the JOBS (Jumpstart Our Business Startups) Act has passed in the US - something designed to reduce regulation on crowdfunding.

As Money Crasher's Andrew Schrage told us, analysts predict the JOBS act will help the industry grow to $500bn in 2013. But growth in new industries tends to mean consolidation - or venture capitalists buying everything out.

Payne predicts Kickstarter will be bought soon. "They're the Facebook and Twitter of crowdfunding. They have a fantastic vertically sliced community, and make lots of money from their transaction model. They will probably sell themselves to a financial institution - banking or venture capitalism."

For the future, Solorio feels the platform is "crossing the chasm" to mainstream crowdfunding. "I think you're going to start seeing entire industries shift to this funding platform. Especially those that were constrained by outsized capital needs."

Of course, with the Western economies still in the doldrums all capital is constrained, so perhaps every company will shift to Kickstarter. Perhaps the crowds aren't so mad after all.

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