Sometimes referred to as fanfunding, hyper funding, micropatronage, or other such terms, crowdfunding can be defined as the activity of raising money from the public through individual contributions that are facilitated by a fundraising campaign hosted on one or another Internet website. A handful of third-party fundraising platforms have garnered most of the attention these days, like Kickstarter and Indiegogo, but there are now estimated to be over 500 crowdfunding platforms around the world servicing individuals and organizations of almost every stripe.
At its root, the crowdfunding concept is very simple. You post your project idea on a website that is set up to accept contributions, spread the word about it any way you can, and hope people become interested enough in it to contribute.
There are several general types of crowdfunding models, but only three that seem at all relevant for the independent artist–the donation model, the investment model, and the micro-rights model.
The donation model runs on the premise that contributors give to a project without expecting any financial return, although some other form of incentive to donate is usually offered (a perk such as a personal letter of thanks from the creator, updates, previews, or whatever). Indeed, bigger incentives are very often provided to induce larger donations.
This model commonly involves the majority of money flowing from many donors providing relatively small contributions. For the music artist, donations would usually be towards an audio or video recording project, or a tour, or something the artist needs to acquire in order to pursue their career, such as a piece of equipment. While no two crowdfunding services of this ilk operate in exactly the same way, they typically allow for the project creators to keep all money raised over the lifespan of the campaign, minus a relatively small commission.
The investment model is one in which money is provided in return for a promise of something of equivalent or greater value in return. These can take several forms, the most common being lending arrangements and advance purchases of the item, but may also including a share of ownership.
The micro rights model allows artists with a music product (or tour) in the works to raise money by selling single-purpose rights (a “micro” licence) to individuals or organizations willing to promote the item (or upcoming performance) in their locality in return for a share of the income on eventual sale of product (or tickets) that they pre-order. These may be entrepreneurial types who are looking to earn money for themselves, or non-profits wanting to raise funds for their organization or a cause, and they might be inclined to go so far as to actually organize a performance event for the artist.
Currently, the donation model is the most popular approach in crowdfunding, with well over half a billion dollars being raised this way in 2011. For the artist it is a significant innovation, in that it is a true departure from the traditional patronage model of earlier times when it was almost exclusively the wealthy who supported creators of artistic works. The other models are arguably less innovative than adaptive, more or less fitting pre-existing financing concepts into the networking environment of the Websphere.
All sorts of variations on, and even combinations of, the above models exist; and policies, procedures and features vary from site to site. For example, some do not release the funds to you unless a designated monetary target is reached, and will refund everyone’s money if it isn’t; others permit you to keep whatever is raised. Some offer both options.
Interestingly, there are artists who have chosen to bypass these crowdfunding “middlemen” altogether and deal directly with the public, relying on their own website, social media, and whatever other means they can to drum up support. In such case, an extra level of trust must form between the artist and potential contributors than would be the case if they were sourcing through an established third-party site. The upside is that there are no commissions to pay and you set your own rules of engagement; plus, all the time and effort you spend marketing your project will be drawing people to your website, not that of some third-party. Crowd sourcing this way has worked quite well for some acts.
Some people carry the misconception that raising money through crowdfunding sites is pretty well a slam-dunk, similar to the rather naïve “just build it and they will come” attitude some have about their own website. Truth is, you need to have a sound strategy around raising money this way and be diligent about implementing it in order to make it work for you. In this respect, crowdfunding is no different from other methods of fundraising—it takes effort and having something about you or your music that attracts.
I have one final thought on this whole subject, which has to do with the potential legal implications of facilitating financial transactions through a third-party crowdfunding site.
Ideally, due diligence should be undertaken by the artist to ensure that he/she is protected against (and indemnified from) any misrepresentation, negligence, misappropriation of funds, and copyright/patent infringement by the site. For example, consider the possible consequences if a crowdfunding site an artist was using were to be sued by another site over a patent infringement issue. If the defending site were to lose, or a cease and desist order issued by the court, that might put the site out of action for some time and the artist’s funding efforts in limbo. It could even jeopardize already contributed funds still held by that site. To my point, at the time of this writing, Kickstarter just happens to be embroiled in a significant legal dispute with ArtistShare over the possible infringement of ArtistShare’s crowdfunding patent. It will be interesting to see how that plays out.