Crowdfunding taking off
With the help of fan donations, game developer Chris Roberts has raised USD 183 mill to develop the popular game Wing Commander. Now, more and more people in Norway are jumping onto the crowdfunding wave.
'Crowdfunding is one of the new economy's success stories. In the same way as we use the website Finn to buy a car or house, we can use other platforms to get money,' says Associate Professor Carsten Bienz at the Department of Finance.
Economists call this phenomena the long tail. The internet has reduced the costs of information to such a degree that it is suddenly possible to find donors for projects that would not previously have been able to raise funding.
'Since the donors commit themselves before a project begins, the entrepreneurs or artists can know in advance whether the project will be a success. The risk is transferred from the entrepreneur to the donor, since the entrepreneur can discontinue the project if they don't get enough support,' says Bienz.
In the 1990s, Wing Commander became one of the world's most popular computer games. The man behind the game at that time, Chris Roberts, has now raised a massive 183 million dollars that will be used to fund a new version of the popular game entitled Star Citizen.
'He basically did this by setting up a website and announcing that he wanted to develop a new game. David Braben, who created Elite, did the same and has now released a new version of the game where the entire game development process was funded by fans,' says Bienz.
The stories of Chris Roberts and Star Citizen or David Braben and Elite might be extreme examples, but on websites like Kickstarter, there are many projects requesting funding. The internet makes it possible for entrepreneurs to reach the people who are interested in their project directly, without having to go via banks or other intermediaries.
At a glance, it appears that a significant number of projects are not necessarily of a technical nature, such as computer games or new gadgets, but also include designer products and even documentary films. Others use it to raise funds for personal use and combine the idea of crowdfunding with charity.
More recently, several crowdfunding platforms have emerged where individuals can contribute through providing loans or funds in return for shares in the companies. Bienz is more sceptical to these projects.
'The problem is that people who invest in these projects don't have much information. We don't know whether the people behind the projects are idealists who don't want to involve banks, or whether they are companies that have been rejected by the banks. The traditional banks often have a much better overview of how things are going with the loan and can also follow-up the borrowers better,' says Bienz.
He advises people to be very wary when entering into such projects.
'If you have money lying around that you want to gamble with, then fine, but it is definitely not something you should risk your personal finances on, ' says Bienz.
The problem, he says, is that the media are good at giving us the success stories of everyone who has earned money on this, while we rarely hear about the people who have lost huge amounts on it.
Taking off in Norway
Most crowdfunding platforms are based in the USA, but more and more platforms are emerging in Norway in line with increased media attention of the phenomena.
The bank DNB is among the companies that have jumped onto the wave with a platform where both entrepreneurs and charitable organisations can ask for funding.
'I'm pretty sure that crowdfunding for developing products and donations to charitable initiatives is here to stay. It is an effective way of organising things. Most of the donations are contributions of a few hundred Norwegian kroner. This is a form of risk management, since the risk is divided between many participants who all have little to lose'.
Breaking the monopoly
In the same way as bloggers and YouTube have broken the newspapers and TV stations' monopolies, crowdfunding hopes to contribute to breaking down the banks' monopoly by taking the middlemen out of the equation, according to Bienz.
'Traditionally, banks and other financial players played the role of gatekeeper when it comes to deciding which projects or businesses to fund. It's unlikely that the banks will suddenly be replaced by crowdfunding, but it is an interesting addition to the financing arena,' says Bienz.