Defining crowdfunding: what’s in and what’s out?
The uncertainty around definitions and the crowdfunding boundary is important as regulators, researchers and practitioners seek to understand the breadth of online finance and the distinctions between the activities beneath them.
It seems like anytime we speak to someone about crowdfunding these days we spend the first 5 minutes discussing ‘what do you mean by crowdfunding, what do we mean by crowdfunding and what type of crowdfunding are you interested in? Part of the confusion around definitions is caused by crowdfunding’s rapid growth and expansion into new markets, funding new type of projects and serving different users but a lot of it is driven by the fact that crowdfunding is quite poorly defined.
Over the past few months this has become very apparent on a number of occasions. The title of the FCA consultation paper on crowdfunding – ‘The FCA’s regulatory approach to crowdfunding (and similar activities)’ is one example of this. The inclusion of ‘the similar activities’ suggest that the FCA appreciate that there were a number of labels at play for describing what they were aiming to regulate. The other reminder came when helping design the survey instrument for the UK Alternative Finance Benchmarking Survey. We were aiming to ensure that we not only had crowdfunding sites covered but also those similar models that didn’t conform to the label.
Here are a few of the finance models involved and the cases for and against including them under the crowdfunding label.
Crowdfunding and microfinance
Sites like Kiva and MyC4 have done fantastic work helping entrepreneurs in the developing world by getting individuals around the world to lend through their platform. As lots of people lend their money in response to appeals by individual entrepreneurs, a casual glance would seem to indicate that the microlending facilitated by Kiva is crowdfunding but there is one relatively subtle difference that differentiates them. Generally with microfinance sites, the entrepreneurs who are seeking loans have already been funded by a microfinance institution (MFI) and the loan is in effect providing liquidity to the MFI. While repayments are still dependent on the entrepreneur repaying, the lender is in effect lending in support of an entrepreneur rather than directly to them (this little known fact about microfinance is discussed here). But should this matter?
This depends on whether you think a necessary condition of crowdfunding is that unless the crowd support the project being funded, it doesn’t get funding. This is something that could be argued either way, but what we see from models like rewards crowdfunding is that the ability to measure demand or interest (especially in all-or-nothing funding) before capital is committed is one of the key values it provides.
Crowdfunding and charitable fundraising
Another type of fundraising that is generally not considered to be crowdfunding is collecting money either on or offline from individuals for a specific charity. Whether this is people with collection tins outside your local supermarket or using online sites such as JustGiving to get support for a marathon you are running for charity it is very much the collecting of small donations from a crowd of people.
One argument is that crowdfunding is for financing something specific, a computer game, an album and that the collections tins and sites like Global Giving funds the charity rather than a specific activity performed by them. This is illustrated by Cancer Research UK who have a crowdfunding site that, separate to their other fundraising activities, allows individuals to back specific pieces of research. But this criticism could surely be levelled at businesses that raise money for growth from the crowd, often without being specific about what the money is needed for.
Crowdfunding and peer-to-peer
Perhaps the distinction that causes the greatest confusion is between crowdfunding and peer-to-peer. The models owe their different names more to their different origins rather than any conscious decision to differentiate between the two. Online crowdfunding began with fans funding music before expanding into the creative industries more widely and beyond to become the rewards based crowdfunding model made popular by sites like Kickstarter and Indiegogo, we have today. Peer-to-peer on the other hand has its origin in sites such as Zopa and LendingClub who facilitate lending to individuals. Where the similarity in the activities became more apparent was when crowds started investing in and lending to businesses with the former going by crowdfunding and the latter peer-to-peer. Both labels have now achieved significant traction with users making it unlikely one group will adopt the other’s label.
While there may be legitimate arguments for excluding some activities from the label crowdfunding it becomes clear that going forward there is one question that will need to be answered – is crowdfunding a description or a label? With the former, allowing anything that could be described as raising money from the crowd would cast the net very wide including some new and not so new ways of raising finance. What is more likely is that the labels that have been attached to different models so far will stick and crowdfunding will become a label for funding for rewards, funding for equity and funding specific projects through donations, all online.