ECONOMY WITHOUT MIDDLEMEN
Crowd economy will allow communities to bring forth relevant products and services
Rapid development of the crowd economy in the entire world came as a surprise for many analysts. Meanwhile, crowdsourcing, crowdfunding and crowdinvesting, which used to raise a host of questions not so long ago, have become important tools of entrepreneurs all over the world. Thanks to crowdfunding platforms dozens of thousands of start-ups, cultural and charity campaigns have been conducted. Experts estimate that the global crowdfunding market will expand by more than two times to reach $34 billion in 2015. Belarus is following closely these global trends. Although the crowd economy came to Belarus not long ago, its debut was quite spectacular. The country has hosted the biggest international conference on the crowd economy in Eastern Europe and has launched several crowdfunding platforms. Experts believe that the country might become one of the crowd technology leaders in the future.
When Community Decides
To think about it, crowdsourcing had been used long before the term “crowd economy” was coined. One of the striking examples is the creation of the Oxford Dictionary that started one and a half century ago. A call to the public to send various terms and their potential collocations for the dictionary entries resulted in more than 6 million letters over 70 years.
Crowd economy has two indisputable advantages: 1) customers directly endorse the product or the service offered by the manufacturer; 2) it brings customers and producers together removing middlemen
Perhaps an even more impressive example is the erection of the Statue of Liberty in New York. The statue itself was a gift from France; however the base had to be paid for by the United States. Since it was the height of the economic crisis, the funds were raised collectively. By the way, the initiator of the public funding in the USA was the famous publisher and journalist Joseph Pulitzer who urged his newspaper readers to donate.
These examples reflect very well the essence of the most important tools of the crowd economy. Today experts would say that the Englishmen used crowdsourcing (sourcing means using resources, reaching an important community goal by the means of volunteers) and the Americans used crowdfunding (a type of crowdsourcing aimed at raising funds to produce goods or services, help people in need or organize an event).
The World Wide Web elevated the development of crowd technologies to a new level by facilitating the communication between the parties not only in terms of community project implementation, but also in terms of doing business. Producers and service providers can now directly communicate with potential customers and invite them to participate in the project implementation. At the same time, every project on crowdfunding platforms has to pass a “customer examination.” Consumers “vote with money” and an irrelevant product will fail to collect adequate funding.
Therefore, experts emphasize a fundamental transformation of relationship between businesses and clients. In the crowd economy of tomorrow consumers will determine the basis of the production program of all economic entities.
“Crowd economy brings consumers and producers together, removing middlemen, who are responsible for a significant share of the final product cost. It has much fewer risks for production of goods; it is getting closer to the pre-order economy. Ideally, the crowd economy will solve the main problem of overproduction when as many goods will be produced as needed by the market,” said Viktor Babariko, Chairman of the Belgazprombank Board and one of the organizers of ICC 2015, the first International Conference on Crowd Economy in Belarus.
Crowdfunding Sets Records
It is not surprising that crowd technologies have been spreading all around the world today. Brought together by the Internet, crowdsourcing enthusiasts have been creating numerous websites such as the free world map OpenStreetMap and the free encyclopedia Wikipedia. The crowdsourcing taxi service Uber now operates in 60 countries. There are also websites where companies can seek crowdsourcing solutions to a specific problem, for instance, ask to design a product.
The development of public funding resources has been unprecedentedly fast as well. For example, US-based Kickstarter, the most successful and well-known crowdfunding platform, attracted $1 billion to fund the listed projects over the first five years and $800 million in its 6th year. The American websites GoFoundMe and IndieGogo are just as popular.
One of the most generously funded projects was the smartwatch Pebble Time with an e-ink display. The project raised the necessary $500,000 in 33 minutes after the
campaign began. The final sum exceeded $20 million. Funny projects often draw public attention. For instance, within a month Zack Brown from the United States raised more than $55,000 for a potato salad instead of the necessary $10.
According to the crowdfunding rules, depending on the terms of the campaign, project backers may support it on a voluntary basis or for a non-monetary reward, including the pre-order of a product or a service. Such projects use either the All or Nothing model (if the project fails to collect the necessary amount of money by the deadline, the funds are returned to sponsors) or the Keep it All model (all of the funds are handed over to the entrepreneur whether the project goal is met or not). If fundraising is successful, crowdfunding platforms charge a certain fee which usually amounts to no more than 15% of the collected sum.
Another form of crowdfunding such as crowdinvesting has been gaining popularity recently. Crowdinvesting envisages financial rewards for the investor in exchange for his/her support. Crowdinvesting encompasses three models, which are crowdlending, equity and royalty models.
According to experts, crowdlending accounts for at least half of the crowdfunding market today. The development of the industry is impressive. This tool offers a clear schedule of repayment of the loan to investors, with the crowdfunding platform playing the role of a certain guarantor. Natural persons may finance both private individuals and legal entities. The main advantage for lenders is better returns as compared to other financial instruments. Borrowers benefit from lower rates and better lending terms. The British resource Zopa was one of the first crowdfunding platforms to introduce the peer-to-peer lending service. The American Lending Club, the German Smava, and the French Babyloan may also be listed as successful examples.
Another promising area is equity crowdfunding when the investor is rewarded with a part of the property, shares, dividends or the right to vote at general shareholders’ meetings of the borrower. This is the most debated and controversial approach, since it covers the organizational and regulatory framework of a borrowing company and is related with higher risks for investors. However, such platforms emerge in Europe quite regularly. Among them are CrowdCube and Seedrs.
The royalty model means that alongside with non-monetary bonuses and other incentives the investor receives an interest in the revenueof theproject.Thisapproach is actively used in financing music projects (SonicAngel platform), development of computer games (LookAtMyGame) and films (Slated).
In a relatively short period of time crowdfunding has gone from the niche market for those who could not attract financing via traditional ways to the full-fledged industry of alternative finance. It is estimated that by 2020 the crowdfunding market will reach the mark of $90 billion. If the current development trend continues, this mark will be hit as early as in 2017.
Taking into account the prospects of this area, more and more big IT companies such as Google, Facebook, WebMoney invest in various crowdfunding mechanisms. For instance, Facebook plans to launch a service to raise funds for charity projects and has installed the button Donate. Earlier the social network
had provided an opportunity to make free money transfers directly via the messenger. To keep their competitive edge traditional players of the financial market, i.e. banks, venture companies, and business angels, also have to introduce various crowdfunding technologies and integrate with crowdfunding platforms. Crowd Economy is Gaining Momentum
The map of the countries using crowdfunding technologies is fairly big and the number of blank spots on this map is gradually decreasing. The United States was a crowdfunding pioneer. By 2025 China whose crowdlending industry annually expands by billions of U.S. dollars may become the leader in this area. Among the crowdfunding champions were the EU member states, in particular the UK, France, Germany, the Netherlands and Spain.
As for Eastern European countries, most of them are at least a couple of years behind the leaders, experts believe. Still, they have a good chance of joining the ranks of front-runners. For example, in Russia there are at least a dozen crowdfunding platforms today, although not all of them are operating efficiently. Planeta, The crowdfunding market is estimated to reach the mark of $90 billion by 2020. If the current development trend continues, this mark will be hit
by 2017 already Boomstarter, and Kroogi are among the most famous. With the help of Russian resources, enthusiasts successfully attract funding for a great variety of projects including even the construction of a spacecraft.
Futurists predict that crowd economy will be achieving greater penetration in all areas of life in the coming years. The proponents of this new model of interaction between people and businesses are full of enthusiasm. They believe that joint efforts make the process of solving almost any task, from choosing the color for the city’s street benches to addressing refugees’ problems, less costly and time-consuming. And they have reasons to think so: more than $10 million has been raised for refugees through crowdfunding campaigns. And new initiatives constantly spring up.
Hence, the society is absolutely able to take on not only minor but also quite important tasks that have been traditionally considered as the responsibility of the state. Given the growing influence of the crowd economy, government agencies are starting to get increasingly interested in the opportunities it offers. They develop the necessary legislation and take a closer look at new technologies.
“Crowdfunding gets much attention in Russia today. I have visited the State Duma three times and read some reports on how to apply this technology in different
areas. The government is aiming for joint work in this direction. Therefore, I believe that crowd technologies will be developing rapidly in the coming five years,” said Fedor Murachkovsky, CEO of the largest Russian crowdfunding platform Planetа.ru.
Crowdfunding technologies are actively used by many national governments. One of the examples is the U.S. government that has recently resorted to crowdsourcing in order to choose the new face of the United States ten-dollar bill. Egypt has launched a crowdfunding campaign in an effort to raise money to return an ancient statue sold to a private collector. Iceland’s constitution is probably the most spectacular example of synergy between the state and crowd technologies. The government asked people to help draft the new constitution through Facebook, Twitter, and YouTube. Platforms in Belarus
Belarus started developing crowdfunding practices in early 2015. It does not mean however that the country had been completely out of the global trends before that. The social Internet platform MaeSens was launched in Belarus in 2011. This charitable meetings auction has raised some Br6 billion so far, including by using crowdfunding mechanisms.
However, to use crowdfunding in its classical form, Belarusians had to turn to foreign websites. It is worth noting that many Belarusian projects were quite a success. Video games and music projects collected thousands of U.S. dollars on the largest crowdfunding platforms of theworld.Theseinclude,forexample, the Belarusian video game Legends of Eisenwald that raised $83,600 on Kickstarter, greatly exceeding the initial $50,000 request. Still, there were considerable difficulties with the organization of crowdfunding campaigns as the project developers were not U.S. residents. This is why the launch of two “domestic” crowdfunding services in Belarus in March and April 2015 was welcomed with great enthusiasm by experts.
The first service Talakosht was launchedbytheBelarusian-language Internet platform Talaka.by that was set up in 2013. Its creators say this mechanism “helps project developers raise funds for socially significant projects from the nation, and provides interested people with an opportunity to support a really important and much-needed project by donating any amount of money.” Two different funding models may be employed: all-or-nothing or keep- it-all (the project needs to raise at least 25% of the initially requested amount). A backer pledges a certain amount of money to the project and provides his/her contact details. If the crowdfunding campaign is a success, the backer transfers the money and receives a reward from the project developer. Talaka.by does not charge project owners fees for using the platform. Moreover, it has plans to cover its own operating expenses through crowdfunding.
The platform Ulej.by was launched a bit later. Belgazprombank became its financial and technological partner. Ulej.by is an analogue of the Kickstarter platform that uses the all-or-nothing funding model. The backers transfer funds to the account of the project they are interested in. If the project falls short of its funding goal, the money is returned to the contributors. If a project is successfully funded, the platform and the bank charge a 12% commission on the funds collected. Ulej.by helps raise funding for not only charity but also business projects in various fields such as technology, culture, science, and education.
The results of the work of the platforms show that Belarusians want to invest in interesting projects as much as Europeans and Americans. Over six months Ulej alone raised around Br570 million
A crowdinvesting platform will be launched in the beginning of 2016. Anyone can support start-ups and fledgling companies by becoming
from 1,500 investors. Funds were raised for 44% of charity and socially-oriented projects listed on the website. However, “crowd pioneers” are not euphoric. There are still a number of problems that need to be solved for the further successful development of the industry. First of all, the matter is about the changes in the legislation.
“What we have today in terms of legislation imposes severe restrictions on the scale of projects,” said Eduard Babariko, CEO of the funding platform Ulej. “For example, we cannot fully involve legal entities in crowdfunding either in the capacity of project owners or sponsors. Every contact with a legal entity is made individually. So far, we cannot ‘automate’ these processes,” he said.
Moreover, the authors of ideas do not always understand the principle of crowdfunding. They have difficulty with the visualization and economics of projects. There are psychological barriers on the part of sponsors. Financing is raised by the projects with the $5,000 budgets, which resulted in a natural demand in the categories “music”, “literature”, “social projects”. By breaking the barrier of $10,000-20,000, which the team of the funding platform believes may happen within two months, the Belarusian crowdfunding will become a serious financial tool for larger projects.
“The minimum that we expect to raise in the future is $100,000 per month for successful projects. Here we do not take into account foreign investment. We are talking about just 5,000 active investors with the average monthly cheque of $20. This, in turn, will make up only 0.08% of the 6-million strong Internet audience in Belarus,” the Ulej head said.
In the meantime, the ideas that have successfully raised the necessary amounts include the projects to create a culinary map of Belarus, a sensory room for the development and integration of severely ill children, to provide winter insulation to a mini-shelter for animals, and a number of projects to make soundtracks and fairytales and cartoons for children, including a Belarusian-language soundtrack for the popular cartoon Peppa Pig.
Meanwhile, the number of crowdfunding platforms continues to increase in Belarus. The banking crowdfunding online-service WikiBank aimed at supporting small and medium-sized business was launched in October. Its working principle is as follows: investors choose the project that they want to finance out of the projects listed on the website, and post an online deposit which is used to finance the project.
Investors have a guaranteed income from the interest rate and also receive bonuses from the business whose project they have supported. These bonuses can be a discount card or every tenth pizza for free. An entrepreneur, in turn, gets access to the “client project expertise”, lending from the bank and a discount on a loan if the project is supported by a large number of people. Given that banks are not very willing to give traditional loans to start-ups today, the service can become extremely popular among new businesses.
A crowdinvesting platform will be launched in the beginning of 2016. Anyone can support startups and fledgling companies by becoming their co-founder. In this case, the investor is not insured against risks: the company’s co-founders will receive dividends if the project is a success and lose all the money if it fails. Followers or Champions?
Thus, Belarus is actively working on a set of proposals on crowdfunding both for businessmen and investors. This, in turn, increases the opportunities for both businessmen in terms of fundraising and also the public who can invest in interesting and needed projects.
As a result, supporters of Belarusian crowd innovations expect the emergence of new businesses on the market, really needed products and services that provide jobs. Small business will grow into mediumsized, and medium-sized into big business, which will have a positive impact on the GDP growth and financial health of the country.
Given the fact that Belarus has well-developed technologies and is a rather small country, crowd economy has very good prospects here.
“Belarus is an ideal country in this respect,” Viktor Babariko is convinced. “It is a rather small country with advanced economy, widespread Internet technologies in the society, and a huge intellectual potential. We can try to do our best to become a leader in innovations which can be globally used in the future.”
Two crowdfunding platforms were launched in Belarus
in March-April 2015
Crowdfunding market grew 167% in 2014 to £10.32 billion from £3.89 billion in 2013, and is forecasted to reach £21.91 billion in 2015
UK Crowdfunding market is the fastest growing in Europe, with growth from £492m in 2012, £939m in 2013 and £1.7b in 2014