Why I Don’t Like the Word Crowdfunding

There’s nothing wrong with the word “crowdfunding” itself. It seems to convey the basic notion of collective payments quite clearly and simply: “crowd”+ “funding”.

In most of the public’s eye, however, “crowdfunding” = “Kickstarter or some Kickstarter-like platform”. This means that in the public’s eye; crowdfunding is:

1. characterized by contingent credit card payments triggered after a campaign reaches a funding threshold;
2. predominantly for creative or quasi-creative works;
3. a process where you give somebody money up front, in the hopes that they do something productive with that money in the future;
4. “reward-based”, where either some token of appreciation or promised uncreated products or services  is given in exchange for the contribution.

In a nutshell, that’s what we think about, in the early 2010s, when we think about crowdfunding. And this is all well and good. I love what Kickstarter and Indiegogo do. I think this model of crowdfunding, where many of the projects take the form of some sort of “pre-retail” production process, has a bright, bright future.

And it is true that, increasingly, the term crowdfunding is being applied to other domains. There is equity-based crowdfunding and real-estate crowdfunding. But  these applications of group payments amassed online are limited to a much smaller percentage of people. When I talk to a well-informed digital consumer, Kickstarter-like sites and processes are what they’re familiar with when they hear the word “crowdfunding”.

To me, it’s  a pity. The word’s current popular usage fails on a pretty magnificent scale: what we call “crowdfunding” could do so much more.

More and more connections.

Crowdfunding has been around for millennia. Maybe the oldest form is called taxation. With taxation, there is of course no say in how your money is spent, aside from the whatever democratic process has been implemented. Indeed, “crowdfunding” or “collective online payments” or whatever we should call it, has two key advantages over taxation. Firstly, crowdfunding allows much more direct consumer choice. In this way, we’re able to take advantage of tremendously more consumer knowledge about what the consumer (“citizen”) wants, instead of relying on a deficient political mechanism.

Secondly, crowdfunding allows for the competition of different producers. In a connected world where crowdfunding has reached sustainable network effects, citizens can communicate  about who they want to provide public services. One can imagine a scenario where a neighborhood organizes a one-off yard waste removal service, then regular garbage collection services as an alternative to city provision, then an adjacent neighborhood takes advantage of the cost-effective solution, and so on.

Then, only in the past several hundred years has a second form of crowdfunding, outside of taxation, been created. This second form provides a way to organize profit-seeking individuals and groups in the form of stocks, bonds, and other securities. The power of this form of crowdfunding was amplified when we were able to create large-scale capital markets through financial innovation. This form of crowdfunding has undoubtedly contributed to an unprecedented acceleration in human wealth, health, and prosperity, especially over the last one hundred years.

Better collaboration across jurisdictional boundaries.

But only in the past several years has the most promising form of crowdfunding yet emerged: the type of crowdfunding where people, largely uninhibited by geographical or jurisdictional boundaries, can organize and transact at ever-decreasing cost.

To me, this is the most exciting ongoing technological development. Steady communications advances allow anyone with a smartphone to organize alternative social institutions other than the one they happened to be born into. Computer science breakthroughs like  the BitCoin protocol provide a way to secure and transact anonymously and instantly at nearly no transaction cost. People can communicate with their voice, with their thoughts, with their creativity, and with their money unlike ever before.

The most important consequence of this innovation is the possibility of an extraordinary explosion in forms of various institutions. What I mean by that is that the boundaries of government and business will start to blur and merge in creative forms that we’ve could have hardly ever conceived before the information age.

I also think this development is a little scary. I think the potential for markets to emerge for unsavory or socially harmful activities looms large. But rather than trying to use a destructive force to hinder the somewhat natural evolution of these processes through regulation or aversion to change, we instead need more people being proactive and constructive. It’s the only way to ensure a longterm solution that works for everyone. We need more payments and communications networks, not fewer.  We need more active voices in whatever form of 21st Century democracy will come about, not fewer.

And for goodness sake, we need more creative thinking about what “crowdfunding” could and should be.

* Images from Meeker, “Global Internet Trends“, 2014.