Despite becoming a popular funding method relatively recently, the underlying principles of crowdfunding have a long and rich history, dating back centuries. It’s the technology and social sharing mindset driving it that make it feel like something new and novel, and that have shaped it into what we think of today as modern crowdfunding.
In this chapter, we’ll take a look at the history of crowdfunding and some of the ways that it’s gained impressive momentum in the past decade to become a viable funding approach for small businesses. For a quick visual summary of the high points of the industry’s lifespan, check out our History of Crowdfunding Infographic.
The Days of Old
The principles of microlending reach as far back to early-1700s Ireland, where Jonathan Swift, dubbed “the father of microcredit,” founded the Irish Loan Fund. The fund provided small loans to low-income, rural families with no collateral or credit history. By the 1800s, more than 300 programs across Ireland were participants, lending small sums to individuals for short periods of time.
Jumping forward to 1976, we see Dr. Muhammad Yunus who is credited for pioneering modern microfinancing. He launched a research project in Bangladesh with the goal of providing banking opportunities to underprivileged individuals with the goal of encouraging self-employment. Within 5 years, the program had more than 30,000 members and had transformed into the Grameen Bank, which services more than 8 million borrowers today.
Cause & Charity Fundraising
Through the mid-90s and early-00s, people were starting to become more connected online with the emergence of popular messaging tools and social sharing platforms, which gave rise to some early examples of cause-based or charity-based crowdfunding.
That includes creative causes, too, with British rock group Marillion promoting their “Tour Fund,” raising $60,000 to fund their U.S. reunion tour through online donations from fans. Following the example of Marillion and a number of other crowdfunded bands, ArtistShare sprang onto the scene in 2000 to become the first ever dedicated fan-funding platform for artists.
Even at this early stage, the potential of crowdfunding was clear, as was made evident by the boom of other charity, cause, and creative-based platforms into the mid-00s. Though the social web tools that made these successes possible were still in their infancy, people on both sides of the crowdfunding equation were beginning to see the power behind the masses.
Microlending & P2P Lending
Into the mid-00s, the cause-based crowdfunding of the late-90s and early-00s gave way to a surge of what came to be known as microlending, microfinance, or peer-to-peer (P2P) lending. Platforms that allowed individuals to lend money outside the bounds of a traditional bank began to emerge—one of the most successful of which was Kiva. Launched in 2005, Kiva gave lenders the opportunity to provide small loans to underprivileged individuals in developing countries with the goal of combating poverty. Since 2005, Kiva has raised an impressive $425 Million in crowdfunded loans with a 99% repayment rate.
In the years after, more microlending platforms with similar models emerged—platforms like Prosper and LendingClub—that capitalized on some of the same altruistic and cause-based drivers of early crowdfunding, but gained additional staying power from an increasingly social web. Becoming more and more common were social features like pictures, videos, stories, and progress updates—all of which helped give backers a better and better sense of the impact of their contribution. In 2006, in-step with this growing social momentum, fundavlog founder Michael Sullivan coined the term “crowdfunding.”
Social Momentum & Major Funding
In 2008 and 2009, IndieGoGo and Kickstarter—which have since grown into 2 of the most popular crowdfunding platforms—sprung onto the scene with the goal of supporting creative entrepreneurs and projects. These platforms helped popularize the rewards-based method of crowdfunding, combining the original principle with an ever-growing social sharing mindset and technical infrastructure.
Crowdfunding Goes to Washington
In April 2012, the Jumpstart Our Business Startups (JOBS) Act passed Congress with bipartisan support and was signed into law by President Obama. The measure has eased key regulatory burdens on entrepreneurs seeking to raise startup capital, with the goal of encouraging small business and startup funding throughout the nation. At the bill’s signing, President Obama remarked, “for the first time, ordinary Americans will be able to go online and invest in the entrepreneurs that they believe in.”
Key provisions of the JOBS Act have already been implemented, including:
Removing the ban on general solicitation – Allowing companies to promote and advertise the merits of their stock offering to the general public, rather than being restricted to sharing that information only with accredited investors. This gives entrepreneurs tremendous new flexibility in getting the word out about their fundraise, and goes hand-in-hand with the potential reach and sharing power of the social web.
Equity Crowdfunding and the Start of Fundable
As the JOBS Act has been gradually rolled out since it passed in April 2012, the crowdfunding landscape has shifted from solely donation and rewards-based fundraising to the emergence of online equity crowdfunding. On May 22, 2012, Fundable was founded, offering the nation’s first combined rewards and equity-based crowdfunding platform. Since that time, we’ve helped dozens of companies raise millions of dollars to start and grow their businesses.
With an average campaign length of only 63 days, we’ve given companies a way to raise an average of $125k per campaign, compared to the industry average of $7k.
Several important provisions of the JOBS Act are still slated to be implemented by the U.S. Securities & Exchange Commission (SEC), including:
Removing the accredited investor requirement – Allowing the general public—those who aren’t considered accredited investors—to invest in private companies. This is when the industry will grow exponentially, increasing the number of available investors from 3.4MM Americans to over 233.7MM, with a combined net worth of over $50T.
In the next chapter, we’ll look at the future of the crowdfunding industry, discussing some of the legislation surrounding crowdfunding and how the JOBS Act is poised to revolutionize the industry.