Participatory financing: a reality in full bloom

In these uncertain economic times, everyone is trying as hard as possible to save money. Meanwhile, however, Internet users are investing millions on the Web for original cultural projects or start-ups. In fact, since 2010, the French have disbursed 6 million euros for some 15,000 projects. In the United States, in 2011 alone, the figure was 1.15 billion euros.

Welcome to the world of participatory financing, better known by its English name of crowdfunding. Kickstarter,  Kisskissbankbank, Ulule, Indiegogo : the list of crowdfunding sites is long.

Give-and-take investments

How does participatory financing work? First of all, Internet users look at the description of the projects that interest them. Depending on the project, the Internet user who invests becomes either a co-producer, i.e. he or she obtains dividends from the project's profits, or a patron, supporting the realization of the project without expecting any returns linked to the eventual profits from the product's commercialization. In the latter case, the contributor may receive a different kind of compensation. This is notably the case for most artistic projects using participatory financing. For example, a contributor who supports the production of a CD may receive additional, exclusive tracks; a contributor who supports the production of a film may receive tickets to the premiere; or a contributor who prefers to support the creation of a video game may receive in-game bonuses. The quantity and value of these rewards increase with the amount of money committed to the project.

The idea of financing artistic works by individuals is not new. Individual patronage has enabled well-known artists to make a living from their art. But this 21st-century version embraces the ideology of Web 2.0: in addition to being democratic, investment is traceable, transparent and often local. On the creators' side, it's a way of continuing to create independently of producers and distributors.

The phenomenon is particularly popular in the video game industry. Some of the big names who shaped electronic entertainment in the 1980s and 1990s are returning to their first love - game creation - freeing themselves from sometimes restrictive studios. The renowned author of point-and-click adventure series (Monkey Island, Day of the Tentacle, Grim Fandango) Tim Schafer, formerly at LucasArts, announced in early 2012 that he had an idea for an adventure game. He estimated he needed $400,000. Within 24 hours, the money raised had far exceeded the goal : $2 million! In the end, Schafer will have raised $3.3 million, making it the most heavily funded project on the Kickstarter platform.

But of course, there's no guarantee of success on these platforms. On Kickstarter, only 43% of projects obtain the desired funding. What's more, funding sites don't take a commission on proposals that don't reach their targets. It's no surprise then that a site like Kisskissbankbank rejects two out of three in pre-selection.

Legal constraints

The crowdfunding industry is young. Most sites were born after 2010. Since then, the phenomenon has exploded, and we're seeing the birth of niche platforms. For example, Arizuka is aimed at those wishing to finance innovative, solidarity-based social projects.

But can this model hold up? While in the United States, it's on a roll, it's more restricted in France due to numerous legal restrictions. Some players in this field are complaining about this. Some, like solidarity finance specialist Benoît Granger, argue that it would be better for the French state to regulate more online gambling, which raises the equivalent of 85 million euros a day, rather than participatory financing. This is because crowdfunding is arguably a much less risky financial risk-taking than online gambling.

Of course, those who believe they'll become rich by investing in numerous promising projects will be disappointed. Participation in the financing of cultural projects (books, films, video games, etc.) is more often than not at a loss. As for start-ups, recent US legislation allows anyone to take shares of up to $10,000 in a company without the SEC, the North American stock market regulator, being notified. But you need a flair for spotting companies with real potential, and this legislation only applies to Americans.

The crowdfunding movement is very young. No one knows whether it will endure, and there are still many questions to be answered about its regulation. Nevertheless, especially for artistic creators, there's a very interesting potential here, enabling one to realize one's project outside the usual production circuits.

Illustration: Spencer Finnley via photopin cc