I’ll have source with that: Pros and cons of crowdfunding

In the early 1700s, the British Admiralty had a big problem. They were losing thousands of seamen every year due to a lack of navigational tools. Their sailors could calculate longitude but there was no mechanism to solve what was known as “The Longitude Problem”.

In 1714, the Government offered the staggering amount of £20,000 (equivalent to approximately $5 million today) to anyone who could provide a solution.

Many MPs and scientists thought there was no solution until a commoner, John Harrison, presented his marine chronometer, an accurate and vacuum-sealed pocket watch that could indeed measure longitude. With some hesitation, the Government eventually paid up.

A modern moniker

This method of accessing the expertise of the wider community for a specific project needed a catchy name. It finally earned one in 2006, when Wired magazine published a story entitled “The Rise in Crowdsourcing”.

It was only appropriate that the term should be coined in a magazine that focuses on how emerging technologies impact culture, as crowdsourcing has boomed in the online age.

We never knew how addictive videos of cats performing stupid acts could be until it became a staple of YouTube. Although it is essentially just a site offering crowdsourced video content, YouTube is viewed by an estimated 800 million unique visitors every month!

Just add cash

Crowds bring expertise, wisdom and knowledge to the table, but they also offer something far more tangible – cash. And it was the most unlikely of candidates who is credited with one of the first examples of so-called ‘crowdfunding’.

In 1997, rock band Marillion (probably best known as one of the favourite groups of Neil, the clinically depressed, pacifist, vegetarian and environmentalist from The Young Ones) turned to their fans to help fund a tour of the USA.

The not-so-imaginatively-named ‘Tour Fund’ generated US$60,000 and the kings of 70s pomp were soon headed across the Atlantic.

Social benefits

Crowdfunding soon took on a more benevolent form through pioneering charity fundraising sites like JustGiving, established at the turn of the century. Then in 2005, Kiva was launched.

Kiva was the first platform that allowed entrepreneurs to lend money to developing areas across the world. It is now one of the most successful micro-lending platforms, having raised more than $165 million through crowdfunding, and with a staggering repayment rate of 98.83 per cent.

The most popular crowdfunding platform in the world today is Kickstarter. Almost 60,000 projects have been financed through Kickstarter; everything from independent film and book projects to Cheesonomics, a card game for cheese aficionados.

Crowdfunding is perfect for niche projects such as these; just imagine the look on the bank manager’s face when she turns the first page of your ‘Cheesonomics’ business plan.

Crowdfunding also cuts through the often tedious process of financing a project, allowing entrepreneurs to focus on what they know and do best. It is also likely to provide a diversified investor base.

Approach with care

But crowdsourcing has limitations. For Australian residents, equity-based projects are illegal due to the absence of compliance and disclosure requirements. However, ASIC has stated that “crowdfunding, as a discrete activity, is not prohibited in Australia, nor is it generally regulated”.

For that reason it is safer to consider participation in such projects as a form of donation rather than a serious investment.

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Zac Zacharia (Managing Director) has been assisting clients to create wealth and secure their futures for over 14 years.

He is also an accomplished presenter and educator

Co-authoring the popular investment book, Property vs Shares.