Crowd Funding – A Growing Market in Germany

• Kickstarter: a successful model in the USA

• Crowd-funding platforms also exist in Germany

• Startnext, Seedmatch, Innovestment

• Crowd Funding – does it complement or replace other financing methods?

After Wikipedia proved that crowd sourcing can be successful, the US company Kickstarter is now demonstrating that crowd funding also works: Through Kickstarter’s website, creative projects gain a platform from which to appeal to a community of private individuals for financing. While the market for this type of funding has already begun to firmly establish itself in the USA, it has only just launched in Germany – but it is off to a promising start.

Crowd funding is a financing method by which the crowd, i.e. the worldwide internet community, takes over the funding of a project. In order to obtain funding, artists and entrepreneurs can present their projects on different portals. Usually this does not require more than stating the required sum and providing a time plan and a convincing presentation. Visitors to the respective portals can then access this information and participate in the funding process by contributing different, individually chosen amounts. Usually a low minimum contribution is required to participate. If the project receives the level of funding it needs from the crowd, then the creators can begin to implement it. Depending on the platform, a return is paid out in monetary or non-material form. The portals finance themselves in different ways: either through a certain portion of the total financing of projects or via donations.

At the moment, the crowd-funding market is characterized by strong growth and the continual setting of new records. Kickstarter, launched in 2009 as one of the first crowd-funding platforms, recently led to a computer game, “Double Fine Adventure,” receiving over 1 million USD in funding in 24 hours. The paying out of interest or other forms of profit-sharing are not part of this process. Instead, there are different levels of rewards for the contributors, from permission to download a free version of the game later on to picking one of the main characters of the game.

In late 2011, crowd-funding platforms came to Germany in the form of Startnext, Innovestment and Seedmatch. These platforms are now also entering a record-setting phase. While the “smarchive” project needed almost three days to receive a sum of 100,000 EUR, the company “lingoking” managed that in barely over five hours.

Crowd funding distinguishes itself from traditional methods of financing in a number of ways:

• People seeking projects and financing turn to a general community instead of banks

• Investors can invest directly in these projects and in their creators

• The balancing of interests between lenders and borrowers can take new forms

• Projects that do not match traditional criteria not only receive funding, but can also realize their targeted added value

Aside from the records that crowd-funding platforms are setting via individual projects, one must keep sight of the fact that there are many projects that cannot be successfully funded. The successes should not hide the fact that crowd funding can provide a better alternative to traditional financing methods for some projects, but by no means for all. There is no specific market failure that one can point to within the field of loan financing by banks that can be healed using crowd funding. However, the question remains to what extent established financial institutes feel threatened by or could profit from these new forms of evaluating creditworthiness and distributing risk: through new target groups, new investor clientele, and new interest determination mechanisms.

Kickstarter, Double Fine Adventure
http://www.handelsblatt.com/unternehmen/it-medien/die-millionenmacher-kickstarter-macht-kreative-koepfe-reich/6193648.html

http://netzwertig.com/2012/02/10/crowdfunding-eine-schleichende-revolution/

http://www.kickstarter.com

Seedmatch, lingoking
https://www.seedmatch.de/system/files/Seedmatch_PM_120203.pdf

http://lochmaier.wordpress.com/2012/02/16/crowdfunding-100-000-e-in-5-stunden-wie-ein-modell-plotzlich-skaliert/

http://www.seedmatch.de

Startnext
http://www.startnext.de

Innovestment
http://www.innovestment.de