Indiegogo recently announced the launch of a new pilot program called Forever Funding that will allow campaigners to raise money indefinitely, a sort of never ending crowdfunding round. If the rewards campaign closes with a successful result the platform gives the organizer the opportunity to open a second everlasting round, with the possibility of asking for more money from the crowd, receiving on-going support for the development of the activity. This leads to pretail crowdfunding: supporters contribute in order to receive specific products. People then tend to consider crowdfunding involvement as a new version of e-commerce: the company is always waiting for financial support in order to produce more. Of course the pre-sale campaign generates working capital as a stepping stone on the way to different forms of funding hopefully in the future; a way to cover the production costs in the short term acting as a springboard in the market.
Clearly there are benefits as mentioned above, but from my point of view a never ending financing opportunity can reduce the relevance and may also affect the sense of urgency of the support. Moreover, having a long-lasting availability of funds can create management inefficiency: delays in delivery the products can occur because of the inability to manage more money than what was anticipated, as it happened in the case of COIN. The business development may not be ready for a higher budget. And what about sustainability? Having huge sums of funds is not necessarily an incentive towards being sustainable, and this is a crucial point. Are companies encouraged to have a sustainability plan if they have a crowdfunding round permanently open? Forever Funding should help companies in covering the maintenance costs and overheads, but at this point there is the strong risk that companies become gravely dependent on the generous contributions of the supporters if they leverage on this opportunity as something more than just an initial boost to the business. Another relevant point is considering the possibility of not being able to fulfil contributors in the long term just based on preselling benefits: in fact in the long term people look for different kinds of benefits, not only the soft ones.
Hence, I believe that for companies with a growth plan the step after the first crowdfunding campaign through reward based platforms should be opening an equity round. Equity crowdfunding is the opportunity of raising funds from those among the crowd who are really committed in the mission of the company, to the point that they want to become shareholders of the firm. They look for higher level benefits in addition to the material ones. Being a shareholder means having a long term readiness for supporting the company in its growth and expansion, it is not only a matter of financial returns. Indiegogo considers Forever Funding as an opportunity to deepen the engagement with funders, but soft benefits may not be enough in the long term. Indeed the opportunity of being part of the company in a quite active way as shareholder is definitely much more fulfilling and satisfying rather than providing financial support in a passive way, just waiting for the product to be satisfied with a compensation. Moreover, in an e-commerce perspective the span of time between the donations and the reward can be very long (as in the already mentioned case of Coin), and this can provoke dissatisfaction, reducing the willingness to support again the company.
Different strategies? Certainly permanent crowdfunding and equity crowdfunding are two different strategies, and they also cater to different situations. Equity campaigns create financial support while enlarging the shareholder base. This implies an economical responsibility towards your investors but also a stronger and long-lasting relation with them. Pretail crowdfunding produces a feeble involvement of the supporters since it is may be based on the temporary desire of the crowd for a specific product in a specific moment.
I believe that permanent crowdfunding campaigns are less likely to be a consistent growth opportunity for young companies, but equity crowdfunding campaigns can be a more effective way to stay in the market setting the base for a sustainable growth.
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Giuditta Armiraglio – is currently a trainee at Invesdor OY a Nothern European crowdfunding platform. She is also currently working towards a Master of Science in Economics and Management for Arts, Culture, Media and Entertainment at Bocconi University in Milan. She is very interested in the potential of equity crowdfunding for the creative sectors.
