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What is Crowd Funding?

Tuesday, April 9th, 2013 by | Filed Under: Computer Terms, In The News

There is a term gaining traction in the online community you likely may have heard through Facebook or some other site – Crowd Funding. What exactly is this phenomena? Simply put, crowd funding is changing the dynamic of how entrepreneurs and developers of content are able to fund their projects. Rather than seeking a loan or starting with capital from an existing company, crowd funding directly connects fans and end users with developers.

A variety of crowd funding sites are readily available online, but two of the most prominent platforms currently running are Kickstarter and Indiegogo, which are all- purpose sites for creative content. Specialized platforms also exist for specific types of funding campaigns, such as PledgeMusic for bands or Fundable for starting a new business.

Kickstarter Logo

A crowd funded project sets a fundraising goal and then asks potential buyers to donate a set amount to help reach that goal. This isn’t just a handout however, instead being more of a pre-order with a variety of options available. For each “tier” of donation, the crowd funding backer will receive a perk in return associated with whatever product is being made.

Crowd funding campaigns typically have a wide range of rewards for every level of backer. These perks start out simple for the least amount of money (getting your name in the credits for $5) and become more extravagant at each tier. These perks range from the equivalent of a standard pre-order (receiving a digital copy of the finished product for $20), getting extras for going above and beyond (a physical copy along with limited edition extras for $50), to the truly bizarre for the most devoted fan (a developer getting a tattoo of the backer’s name for $2000). Some of these perks create serious incentives for potential backers, such as allowing them to get involved in the development process itself to help with design.

But why go with a campaign of this type instead of raising funds normally? Crowd funding allows developers – of nearly any type of content – to execute their own vision for a product without the interference of a publisher or some other overhead entity that may not see eye-to-eye on all aspects of a project. While computer game publishers may not want to risk the investment of releasing a sequel or reboot of an old school game, crowd funding support for sequels to ‘80s and ‘90s computer games has been overwhelming, with some earning millions of dollars within days.

Fundraising Amounts

Wasteland 2, a modern day follow-up to a computer game originally release in 1988, secured 2.8 million dollars over the course of its fundraising campaign. With four days still to go in the campaign as of this writing, the Kickstarter for “Torment: Numenera,” the follow-up to the cult classic PC game “Planescape: Torment,” currently has raised 3.2 million dollars – far surpassing the original goal of only $900,000.

Wasteland 2

Of course, not every crowd funding campaign is a success story, and many fail to meet their goals. Crowd funding by necessity requires excellent social media presence and a product that will make people want to share the campaign with everyone they know. Campaigns also aren’t free money of course, as the crowd funding campaign takes a cut of the money raised. If the campaign is successful, the developer pays a percentage of the amount raised back to the crowd funding platform, which is typically in the 4 – 9% range.

But what if a campaign doesn’t reach its funding goal? Different sites handle this situation differently, using either “flexible funding” or an “all or nothing” setup. With all-or-nothing, a campaign that doesn’t reach its goal receives no funds, and none of the backers actually have any money removed from their bank accounts. While this is a letdown for the developer, it prevents disappointment on the part of the backers when a sub-par product is released, or never released at all. Flexible funding still funds the project even when the campaign goal isn’t reached, but they also typically feature a higher fee structure from the crowd funding platform.

While crowd funding has been incredibly useful for various software projects, it has also quickly become a tool for many other developers of different content. Indie musicians have successfully used Kickstarter to raise the funds to record and physically release an album without the backing of a record label, and some are even using crowd funding to raise money for touring. Campaigns have been launched for everything from making a calendar to raising money for lung transplants. The usage of crowd funding is only likely to increase in the future, as buyers can now cut out the middle men and take part directly in the creation of any project they are excited about.

~ Ty Arthur

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