Crowdfunding pros and cons: is it good or bad for the entertainment industry?

Crowdfunding is a fast growing practice. But is it overall or positive or negative for the entertainment industry? Find out what are the pros and cons of crowdfunding, as well as the best crowdfunding sites. Are Kickstarter video games, board games and films generally good?

What is crowdfunding?

Crowdfunding is the practice of funding the development of a new product by raising money from a large number of people, usually via the Internet. Crowdfunding has a long history. War bonds were in fact a sort of crowdfunding to finance military conflicts. There is also evidence of the use of crowdfunding by the Bank of England in the 1730s as a way to restore trust in the pound during a currency crisis. The French philosopher and sociologist August Comte was one of the pioneers of crowdfunding. He successfully created a system of public subscription to fund his work. Many friends of the philosopher and intellectuals in Paris contributed economically to this effort. The Statue of Liberty was also funded collectively via small donations in a campaign launched by Joseph Pulitzer in his newspaper The New York World.

The cooperative movement in the 19th and 20th century can also be considered a precursor of modern crowdfunding. The first well-known case of modern crowdfunding can be attributed to the British rock band "Marillion" which raised $60,000 by an online campaign in 1997 to fund their USA tour. Crowdfunding was later used to fund music albums, films and software development. Today most of the projects financed via crowdfunding are entertainment related. In particular the gaming industry is exploiting this new funding practice. Thanks to crowdfunding many board games and video games are now produced by small publishers.

Top crowdfunding sites

The use of crowdfunding  has grown quickly in recent times. Many different online platforms have emerged, most of them based in the USA. This is a list with some of the top crowfunding sites: 

• ArtistShare was the first crownfunding site which launched in 2003. It specializes in music. It operates as a record label for independent artists.
• Indiegogo was lauched in 2008 as a website that would help people raise funding for start-up business, charities and creative ideas. They have a success rate of around 44% in their campaigns. They charge a 9% fee of the funds raised.
• Kickstarter is the largest crowdfunding site with more than 13 million visitors every month. It was launched in 2009. Kickstarter charges a 5% fee for the successfully funded projects, but payments are processed through Stripe which charges and additional 3% to 5% of the amount. They have a 36% success rate. Many Kickstarter campaigns have raised millions of dollars. Music, films, technological gadget, board games and card games are the most popular categories on Kickstarter. 
• RocketHub was incorporated in 2009 and launched in 2010. They help entrepreneurs, musicians, filmmakers,  theatre producers and fashion designers among others to collect money for their projects. They partner up with many different organizations and charge 4% commission fee plus 4% credit card handling fee.
• MicroVentures is another crowdfunding site which helps connect investors and start-ups. It was launched in 2010, and thanks to MicroVentures 25,000 people have invested over $600 million in about 100 companies so far.

​Watch this interesting TEDxTalk on the past, present and future of crowdfunding:

Crowdfunding pros and cons

In the context of the entertainment industry, crowdfunding offers many advantages but also some disadvantages. Here we summarize the most important ones:

Pros of crowdfunding:

• Democratize creation: Crowdfunding lowers entry barriers to the entertainment industry, helping independent and small creators to launch their products. You don't need support from a big company or a rich person to launch an idea. You just need enough people interested in it.
• Creativity: thanks to collective investment many products that could be considered as too unconventional or risky for the mainstream market end up being produced.
• Equity: creators do not have to give away equity in their business or project. They can retain the intellectual property rights. Backers of project only get one or several copies of the product and some rewards.
• Buzz: successful campaigns in crowdfunding may generate a lot of hype and positive word of mouth about a product. Kickstarter PC and console video games, board games, music, etc. may see their popularity skyrocket which often help them later in conventional distribution channels.
• Relationships: crowdfunding platforms provide a new channel of communication between the consumer and producer of entertainment products. Backers usually interact with creators on the campaign pages on crowdfunding sites. They also provide feedback and sometimes contribute to shape the final product.  
• Cheap funding: for entrepreneurs crowdfunding is a cheaper method of funding than asking for a bank loan. Moreover they do not require strict criteria and many crowdfunding campaigns manage to raise larges amount of capital. For instance "Star Citizen" is a videogame that has collected more than $113 million, and "Pebble Time" a smartwatch that has raised more than $20 million (both on Kickstarter).
• Scalability: according to the level of support the campaign may offer different stretch goals. If the project collect more money, thanks to the economies of scale the creator may be able to offer some perks to the backers who trusted the project. Also most camapigns allow for different levels of pledges so that the backer may adapt her/his support according to her/his financial situation.

Cons of crowdfunding:

• Costly: A successful crowdfunding campaign is not as simple as it may look. It require a lot of work and promotional effort. Usually an attractive video and an interesting set of rewards are indispensable. So be ready to spend some money before you get your product funded.
• Fast growing competition: Some websites such as Kickstarter and Indigogo have some many similar projects running in parallel. It is becoming increasingly difficult to bring attention over a particular project. Creating some traction for a new campaign is not always easy and luck is often an element for its success.
• Exposure and plagiarism: there is a chance that your great idea is replicated by other people or companies. In some cases, as in the board game industry, patents and trademarks often do not successfully shield the original against plagiarism.
• Reputation: more than half of the campaigns are not successfully funded. You risk embarrassment if your campaign fails to reach its minimum goals. In some cases trying to fund a project through crowdfunding may also be interpreted as a failure to convince a professional publisher that your game, movie or album is good enough. If the funded project does not deliver to backer's expectations the creator can be also strongly criticized.
• Regulation: there are also many problems and risks associated with the inadequate regulation crowdfunding. There are a lack of protection of investors. In some cases successfully funded products are never produced and investors lose their money. They cannot claim it back from the crowdfunding website.
• Quality: many of the products launched through crowdfunding have not been properly tested or undergone a professional development. For this reason, sometimes the video games, board games, films and other entertainment products coming out of Kicktarter or similar companies are not properly polished and may disappoint backers.
• Shifting risk to consumer: Some companies are starting to use crowdfunding to fund projects which in the past were funded by other means. These companies are simply making the final consumer to bear the risk of a project. Before if the product was not good the company suffered directly the consequences now crowdfunding is used as a sort of pre-order. 

What do you think, has crowdfunding overall a positive impact on the entertainment industry or a negative one? Is this opening the gate to a lot of poor quality products or simply democratizing the industry? Join our debate (below).

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