ECON­OMY WITH­OUT MID­DLE­MEN

Crowd econ­omy will al­low com­mu­ni­ties to bring forth rel­e­vant prod­ucts and ser­vices

Economy of Belarus - - FRONT PAGE - Anna KOT

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

their co-founder.

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

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