Context of the emergence of crowdfunding

Crowdfunding: The Birth of a New Industry in the Global Financial Intermediation Landscape – Part 1

Summary:

– Crowdfunding is a booming industry that raised more than $5 billion worldwide in 2013, nearly two-thirds of which was in the United States, and is expected to reach $10 billion by the end of 2014.

– In France, this market is growing rapidly, exceeding €150 million raised in 2014, compared to less than €10 million before 2011.

– This young industry is taking shape and carving out a place for itself in the financing landscape, alongside banks and traditional players in personal and business financing.

– France is one of the most advanced countries, both in terms of regulation and the ecosystem that has developed in recent years, and has all the assets to become a key player in crowdfunding worldwide in the future.

Crowdfunding is currently a hot topic in the financial and economic press. This recent phenomenon has emerged in a difficult context, with business financing appearing to be the most important issue for developed economies since the banking crisis.

1 – The cultural industry in transition

Crowdfunding is a young industry that emerged in the first decade of^{the 21st} century and is gradually gaining momentum within the larger financial intermediation industry. It has benefited from the combined effects of the development of the internet, the emergence of community sites such as forums and social networks as global social phenomena, and the scarcity of credit and financing following the 2008 financial crisis.

1.1 – Development of online communities

The cultural industry is undergoing profound change with the emergence of the internet and technological advances in data processing and other digital innovations. Its functioning has been disrupted. These advances have enabled a generation to promote their artistic work through community platforms such as MySpace, long considered a space dedicated to young composers or musical artists, leading to major labels, access to album production, and an audience with which numerous interactions are now possible.

In 2005, MySpace was the^fourth most visited website and enabled the emergence of now widely known players such as the world’s largest social network, Facebook. MySpace also helped to change the economic model of the music industry.

1.2 – Upheavals in the creative industry

Accompanied by rapid technological development and the dematerialization of music, film, and video games, creative professionals found in the internet a means of expression, promotion, and distribution for their work, while benefiting from increasingly low production costs. However, the creative industry can be broken down into two distinct fields, one encompassing the industry’s historical practices, and the other taking its essence from technological upheavals, which are causing major changes in consumer habits and in the tools available to creative professionals. This idea is perfectly summed up in the overview of cultural and creative industries: « While productivity gains in the economy are exponential, it still takes two hours and twelve actors to perform Molière’s Tartuffe, whether in 1664 or 2015. »

This means that not all sectors of the industry are evolving in the same way. According to the overview of cultural and creative industries, television, video games and, to a lesser extent, cinema have seen their revenues increase, while the music, press and radio markets have experienced a sharp decline in income. This is mainly due to the ability of industries to adapt to new modes of consumption and dissemination of culture, such as streaming and the cloud, and their ability to combat the scourge of illegal piracy of cultural works. These new modes of consumption, which are insufficiently regulated, are based on the concept of peer-to-peer, which operates within communities that are more or less developed through sharing and cooperation. As a result, ownership is no longer sought after by the community, and content sharing is optimal for maximizing consumption by the entire community, which can enjoy a dematerialized good without harming the consumption of others. Cultural production thus becomes a common good, and economic models must adapt to this drastic change.

2 – Emergence and development of the social and solidarity economy

At the same time, the early^21st century has been marked by the social and solidarity economy (SSE) (see Social and solidarity economy: current challenges for a booming sectorby Lucia Lizarzaburu for BSI Economics). Born in France in the 1980s, this new economy is based on social, democratic, and solidarity values, as opposed to capitalism, which is often considered individualistic and based on the concept of individual property.

Increase in the importance of the SSE in France and Europe

Between 2000 and 2010, France saw 23% growth in employment in the social economy, while at the same time jobs in the private sector grew by only 7%. Nearly half of these jobs were in the social action sector. In Europe, job growth between 2003 and 2010 was 26%, driven by strong enthusiasm in major European countries such as Germany, Spain, and Italy. France ranks among the leaders in Europe in terms of the SSE. According to a study[1]by CIRIEC[2], in 2010 France had 2.3 million jobs, or 9% of total employment in France, behind Sweden (11%), Belgium (10.3%), and the Netherlands (10.2%), and close to Italy (9.7%).

According to INSEE, the weight of the SSE has continued to increase, and has even accelerated following the 2008 financial crisis. In France, the share of employment in associations (which make up nearly 80% of the SSE alongside foundations, cooperatives, and mutual societies) rose from 7.8% in 2007 to 8.1% in 2010.[3].

The main characteristic of the structures that make up the SSE ecosystem is the principle of solidarity or social utility, which applies not only to their operation but also to their activities. These private companies[4], adopt a democratic and participatory management style. According to the National Council of Regional Chambers of Social Economy, the values of the SSE are also based on voluntarism, limited profitability, and the autonomy of structures, even though cooperation with public authorities exists.

3 – The beginnings of crowdfunding in France and around the world

The points outlined above are most likely to have been at the origin of crowdfunding as it existed in its early days. Changes in the creative industry and the growth of the social and solidarity economy, combined with new internet and social media technologies, have led to the emergence of a new industry in the financing landscape.

3.1 – A favorable environment for the emergence of new sources of financing

According to François Desroziers[5, « the crisis has made the general public more aware of the role of banks in managing their savings. » This feeling of mistrust towards financial institutions has led households to reconsider the very role of their savings and their usefulness in Western societies. Coupled with the decline in rates of return on financial investments[6], these phenomena have unleashed the financial potential of households, who have decided to take back control of their savings and invest in the new economy.

Crowdfunding platforms have therefore benefited both from increased demand for financing due to upheavals in the creative industry and from the widespread rise in unemployment, which has paved the way for numerous SSE initiatives. But also from a sharp increase in the supply of capital, freed up by households for new forms of investment likely to meet the requirements of transparency, simplicity, and ethics. This new activist momentum in participatory and citizen-led management has given rise to the emergence of what is known as crowdsourcing.

3.2 – The new philosophy of crowdsourcing

Coined in 2006, the term crowdsourcing refers to the call for contributions from the crowd to projects requiring knowledge and/or skills that generally combine a large number of different disciplines that only a crowd can bring together. It is therefore a growth driver for large companies or institutions that benefit from this participatory and collaborative production. The most obvious example of crowdsourcing is Wikipedia, a participatory, volunteer-based encyclopedia that pools the expertise and knowledge of Internet users, resulting in the largest online encyclopedia. Google is also a major player in crowdsourcing.

3.3 – First appearance of crowdfunding in the early 2000s

In the United States and England, crowdfunding initiatives appeared in the late 1990s. They consisted of posting a call for donations on the website of an organization or artist. Some fundraisers already offered rewards to donors. This was the materialization of donation-for-donation initiatives, the operating principles of which we will detail further on.

In France, it was not until 2008 and Grégoire’s fundraising campaign that[7]via the MyMajorCompany website that crowdfunding reached the ears of the general public. However, an individual initiative calling for donations with non-financial rewards had already enabled the financing of a short film in August 2004.

Conclusion

Today, the industry is structured and regulated according to principles that evolve as experiences and projects develop. To be continued in part 2!