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July 10, 2013

Kickstarter in Canada: Friend or Foe

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Reposted from Socialfinance.ca

Whether or not you are an aspiring entrepreneur or an enthusiastic cheerleader for the newest knitting club yet to weave its way into a local craft store, you likely make more than an occasional visit to Kickstarter—a household name for crowdfunding aficionados in North America and, since October 2012, the UK.

In its latest move to expand the platform’s international presence, the New York City-based Kickstarter announced on Thursday, June 27, that the site will soon enable Canadian projects to connect directly with Canadian funders—a turning point for Canadians, who have had to rely on partnerships with networks south of the border to receive or grant financing through the website. But does this mean good news or bad for the budding impact investment sector in Canada?

Crowdfunding models:

While the concept of taking advantage of pooled resources to fund a project is definitely not novel to those of us donating to a friend’s marathon run or to an exciting medical research study, it is important to recognize that crowdfunding has many different faces. Although there are various ways to identify crowdfunding platforms, the following is a applicable categorization which will prove useful to understanding the current features and limitations in this sector:

The Donation model – projects collect contributions and are not expected to generate returns to their funders. In order to entice donations and garner additional support for their products, projects can sometimes offer donors rewards and other non-monetary incentives.

The Lending model – projects raise funds with the expectation that they will repay their lenders either under:

1. a traditional lending agreement platform*: projects repay lenders with interest;

2. a forgivable loan platform*: projects make repayments once they begin to bring in either revenues or profits

3. or a pre-sales platform: projects promise lenders advance copies of the final product, which typically amount to the market value of the lenders’ initial pledge.

The Investment model* – projects provide stakeholders equity, following either:

1. a securities investment model: contributors receive ownership in an initiative by buying shares; or

2. a profit/revenue-sharing model: contributors earn a portion of revenues or profits generated by an initiative.

*No public platforms currently exist in Canada, as securities regulations do not allow for debt or equity-based crowdfunding for retail (non-accredited) investors.

According to the Canada Media Fund’s Crowdfunding report, of the 45 crowdfunding platforms operational in Canada in 2012, only 17 were Canada-based and just a handful reportedly followed some type of lending model (ie. Ideacious, SoKap, etc). Subject to relatively few operational restrictions, the donation model is currently the main model applied by crowdfunding platforms in Canada. Although crowdfunding activity is only becoming more animated in Canada, the need to align regulations across provincial boundaries and the relatively small population of interested donors may continue to pose obstacles to further expansion of this exciting financing opportunity.

For more information on these categories, please refer to the Canada Media Fund’s report or to a recent blogpost by my fellow writer, Carlos Pinto Lobo on June 7, 2013.

Where does Kickstarter fit in? 

Kickstarter’s funding platform follows the donation and reward-based model. According to a Massolution Crowdfunding Industry Report, such donations and rewards-based platforms generated nearly 52% of all money raised by crowdfunding platforms around the world in 2012 (44% of total funds was raised by campaigns using the lending model and roughly 4% was raised via the investment model).

However, despite raising just under US$686 million to date (which would represent more than 13.4% of the US$5.1 billion expected to be raised through crowdfunding mechanisms in 2013 [Massolution]), Kickstarter reported that less than 45% of its projects (44,089 projects) were successfully funded across all 13 project categories supported by the site [Data is current as of June 29, 2013]. The following is a list of Kickstarter’s project categories (reported in terms of the most successful dollars raised): games, film & video, design, music, technology, publishing, art, food, comics, theater, fashion, photography, and dance.

How “social” is crowdfunding?

In the case of Kickstarter, success for a project means the achievement of its own somewhat arbitrarily-set funding goal. While all initiatives are checked against a set list of guidelines, project plans and their feasibility are not explicitly audited—neither is the project’s performance following its receipt of pledges. In other words, projects that fit one of 13 categories supported by the platform, are granted complete freedom to disperse their newly-acquired funds and are not subject to any accountability or transparency mandates. As more people start to take a firmer stance on how their donations are used and about the impact of their altruisms, will donation-only platforms like Kickstarter give way to lending and equity platforms championing greater sustainability and buy-in from contributors?

Social impact is already gaining prevalence as a priority area on various crowdfunding platforms. Below are just two well-known examples of how collective financing is being leveraged for social impact in Canada and internationally.

1. Catalyst is a donation-based crowdfunding platform that was launched by the Centre for Social Innovation in March 2013, which focuses on supporting projects geared toward making a social impact. Catalyst has a leg up on its competition through its ability to leverage the CSI network; providing projects with support, training, resources and exposure to improve their chances of success.

2. Indiegogo is an international crowdfunding platform for those passionate about driving social change. Despite Kickstarter’s size, Indiegogo leads the way in terms of international appeal, having introduced new languages, currencies and country-specific homepages to its repertoire. Earlier in 2013, Indiegogo also joined forces with Adyen, seeking to not only expand the reach of the crowdfunding giant worldwide, but also to dramatically increase funding as a result of the introduction of a much-needed variety of payment methods.

With the growing diversity of campaigns seeking to inspire crowds to pool their financial resources via the Internet, are we moving toward an “over-crowding” of the market?

A big worry among the 45 Canada-based crowdfunding platforms [Data is current as of April 2013, Massolution.] is the potential for an “over-crowded” market, associated in part with Kickstarter’s move into Canada. However, despite its mass appeal, companies like Kickstarter may find it difficult to stand up to those platforms which are better-integrated within their communities and which prioritize social growth.

On the other hand, even though Canada’s crowdfunding sector offers both playful and responsible projects for crowds to woo, it is still not clear how much impact a single donation will generate. Similarly, unlike many impact investing approaches, no systematic attempts to measure performance or to make entrepreneurs accountable for delivering on their intentions once they receive their financing have yet been made. Nevertheless, with crowd-investing (ie. crowdfunding platforms following the investment model) continuing to face significant regulatory restrictions in Canada, the donation-only crowdfunding model, with all of its pitfalls, will still beat out the competition in the short run.

Hence, while public policy facilitating the investment crowdfunding model catches up to the progress already being made in the US, entrepreneurs in need of seed-funding will likely continue to turn to the donation-only platforms to meet their financing needs [for more on the latest crowdfunding developments in the US and the JOBS Act, see here].

Hopefully, Kickstarter will demonstrate the power of the crowd to mobilize capital into high impact, high potential projects. This could provide a strong base for impact investing to build upon if/when investment crowdfunding is possible in Canada.

Yet ruminating on these questions, I can’t help but wonder: Don’t all crowdfunding platforms, regardless of the model they follow, build a culture of collectivism? And regardless of the current divergence in crowdfunding movements, isn’t it this culture which will be imperative to scaling the social investment we all strive to make around us? Given these questions, perhaps an additional crowdfunder should not be a concern but rather, an opportunity for platforms which are already operational in Canada.