In their 2013 report World Bank estimates crowdfunding investment to be $96 billion by 2025, more than the GDP of Slovakia. Even more startling: of the $96 billion, China could be responsible for more than half.
Crowdfunding itself is in its infancy with roots dating back to the late 2000’s. Crowdfunding consists of raising money via contributions from a large pool of people typically done over the internet. Most popular in the United States, crowdfunding sites such as Kickstarter, (blocked in China), are gaining traction, having funneled around $815 million from “backers” to various creative projects.
While China has yet to reach these numbers, crowdfunding is steadily growing, particularly amongst Chinese authors. Sites such as Zhongchou.com and Dreamore.com are among the most popular. Funding is done via a reward system where “backers” are promised certain rewards for their contributions. These rewards can range from signed copies of the particular book to private lunches with the authors themselves, typically reserved for the more generous contributors.
As well as books, crowdfunding touches several other sectors including technology, art, film, games, photography, etc. A visit to any of the above sites will quickly show the diversity of the projects. From open source 3D printers to sex toys linked to your mobile device, the variety is endless. However World Bank says, “Innovative ideas, especially in the technology category, trails far behind the United States in terms of both quality and quantity.” Oculus Rift, a US crowdfunded virtual reality headset raised more than $2 million via Kickstarter and was recently purchased by Facebook for $2 billion. This serves as an example of the potential crowdfunding has within the technology sector.
The advantage of this method of financing is the opportunity to move away from more traditional options involving financial institutions to a more direct connection with consumers. As the World Bank puts it, “Crowdfunding offers the potential for a radical evolution of our largely institutional framework for allocating capital”. Basically crowdfunding allows anyone with access to the internet to fund any projects they want. Not only does this empower consumers, it allows entrepreneurs to raise money they may not have been able to get from typical investors. The reward system can also serve as a pre-order before the product is available to the market and a way to test potential market response and reception.
Because of crowdfundings close tie with social media, projects can often create “buzz” and go viral overnight. This means that crowdfunding isn’t only a useful tool for generating capital but also as a form of advertisement and promotion. Mr Li Yaohui, Zhongchou.com’s executive has agreed that the promotion can often be more important than the money.
However, there is one big difference between the crowdfunding and traditional financing: equity. Equity crowdfunding is still illegal in China. Conor Roche, co-founder of Fieldwork.info and Culture Crowd, is attempting to launch a crowdfunding platform where backers receive equity as opposed to the typical reward based system. This could give China a leg up on Western counterparts and increase China’s entrepreneurial opportunities. While it is legal in the US, “backers” must have a minimum net worth of $1million dollars creating a massive barrier to the middle class. The Chinese government is still cautiously testing the waters with equity crowdfunding because of the potential for fraud. Currently they are conducting an experiment where backers are allowed to invest RMB 100 twice for an expected 7% annual return.
China’s government will play a pivotal roll in years to come on whether or not crowdfunding reaches its potential or not. Permissive policy and hindering regulations contrarily will determine the future of crowdfunding in China. More specifically, a study by Liang Zhao, points to the overall system. As opposed to what Liang calls a “rule-based” system typical of Western economies and societies, China operates on a “relation-based” system which puts more weight on trust and personal connections. Since crowdfunding is conducted via the internet, Chinese “backers” are often wary and skeptical.
*Image from Zhongchou.com
* Cover Image Courtesy of Ourcrowd.com