(Editor’s note: Kevin Lawton is the author of “The Crowdfunding Revolution”. The following is an excerpt from the book.)

My journey into crowdfunding was not exactly typical.

Originally, I began exploring a new concept for an early-stage VC firm, one that was a radical departure from the old-school model, which seems to hold a belief that the minds of a few partners and their ‘Rolodex’ can outperform the collective wisdom of the billions of people on the planet.

In researching this new model, I became increasingly exposed to and excited about crowdfunding, which shares many of the dynamics.  While in many ways still in its “first inning”, crowdfunding is already on an exponential tear, and has the potential to be a powerhouse of capital formation and an integral part of Venture Capital’s future.

While many forms of crowdfunding are blossoming (e.g. pledge-based for creative projects, and peer-to-peer lending), one of the most promising forms (crowdfunding in exchange for equity) has been nearly completely stymied by archaic securities regulations, which prevent entrepreneurs from soliciting funding from the public (which of course is precisely what general crowdfunding is).

That’s extremely disappointing, as the Internet and especially social networking dynamics afford crowdfunding potentials of transparency, trust signaling and market-based price discovery that are nearly impossible with small groups of “professional investors”.

Fortunately, there are many activities afoot, that bode well for even equity-based crowdfunding, regardless of regulatory resistance.  My recent book, The Crowdfunding Revolution | Social Networking Meets Venture Financing, encapsulates many related thoughts about the current state of affairs of crowdfunding as well as its powerful socio-economic future.

It also outlines many of the macro forces disrupting conventional capital formation, which are putting a huge push behind crowdfunding.  If you enjoyed my three-part presentation, which built up to the case for crowdfunding, I believe you’ll equally enjoy this book – an excerpt of which follows.

Introduction

Ask not what the world needs.  Ask what makes you
come alive… then go do it.  Because what the world
needs is people who have come alive.
―Howard Thurman

“Crowdfunding describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations”[i], as defined by Wikipedia.  That’s a pretty good start, although the true social vibrance of crowdfunding is difficult to capture in a definition.  The crowdfunding space is quite diverse, comprised of many niches, and shares a lot of social networking’s energy.  Whether to solicit donations and create a fan base for an around-the-world sailing adventure, to pre-sell copies of a book, or to finance a startup in return for equity, some form of crowdfunding is available.  Just how encompassing crowdfunding is, speaks to the enormity of its potential for economic and social impact.  In the same way that social networking changed how we allocate time, crowdfunding will change how we allocate capital.

Never before has the human race truly integrated the collective wisdom of our now 7 billion person crowd, with mechanisms to allocate capital.  Yet 2 billion (or more) people already use the Internet, and usage penetration is increasing rapidly.  Until this moment in our history, capital allocation was largely the province of a relatively small and entrenched minority.  Given the lack of available mechanisms to coordinate otherwise, and the relatively slower rate of historical change, our systems necessarily coped.  But with the exponentially explosive growth of connectivity and complexity via physical and social technologies, the classical human-to-human (h2h) networks and centralized planning of capital allocation are folding and becoming dysfunctional.  What are weaknesses of the old methods, especially the sheer scale and volume of information and ideas, are strengths of a new model of funding which has the potential to tap an almost unfathomable collective intelligence to process this collective complexity.  Therein lies the immense future of the crowdfunding revolution.

To the more recent generations, thoughts of  days without social networking are only a subject of amusement and story telling.  In the same way, future generations will likely grow up with crowdfunding and wonder how venture financing functioned any other way.  So many socio-economic changes which have already taken place, were accompanied by fervent disbelief, often from the incumbents.  There’s no reason to believe that crowdfunding will be any different.  But one only has to look around to see the major shifts enabled by modern technologies.  Book publishing, just to pick one, has been radically transformed by the ability to publish electronically.  In fact, my co-author Dan and I live some 12,000 kilometers apart and have never even physically met.  That would have been nearly impossible, not long ago!  More broadly, the entire media industry has undertaken systemic change, often begrudgingly integrating with the electronic age of social networking that we live in.

In 1865, a young French sculptor named Frédéric-Auguste Bartholdi went to Versailles, where he had an inspirational conversation with Edouard de Laboulaye, a prominent historian and admirer of the United States.  De Laboulaye observed that the first centennial of the United States would occur in just over 10 years, in 1876, and thought it would a kind gesture if France presented America with a commemorating gift for the occasion.  Bartholdi had the inspiration of a giant statue, one that he would spend many years involved with, of a woman called “Liberty Enlightening the World.”  The statue itself would be paid for by the French people, and the pedestal that it stood on would be financed and built by the Americans.[iii]

Years later, Bartholdi founded the Franco-American Union, a group of French and American supporters, to help raise money for the statue.  And he recruited Alexandre-Gustave Eiffel (who later designed the Eiffel Tower) for its design work.  But the centennial date approached, the project was behind time and it was difficult to raise the funds to build the statue in France.  Bartholdi et al. continued anyways.  Then in 1880, they had the idea of holding a ‘Liberty’ lottery.  Fortunately, French law permitted lotteries for charitable and artistic causes, and the French government authorized the lottery.  Among the prizes were models of the statue.  It took time, but the crowdfunding efforts on the French side ultimately succeeded.

On the American side, things were not going well.  The U.S. Congress didn’t want to provide funding for the pedestal, and neither did New York.  As pieces of the statue were built, they were shipped to America, where they were used as tourist attractions to raise money.  But that didn’t raise enough.  In 1883, when the U.S. Congress voted down a new attempt to provide funding for the pedestal, Joseph Pulitzer, publisher of the New York World was outraged. He launched a funding campaign in his newspaper.  But his then reader base was not very large, and produced very little in donations.  As things broke down, other states began competing for the location of the statue.  But, as Pulitzer’s reader base grew, he made another attempt, and repeatedly implored readers to donate, appealing to charity of the masses, no matter how poor.  This time, the campaign started producing results.  When it was announced that the ship containing the statue’s crated parts would leave France, a new wave of donations occurred.  Soon, work on the pedestal was re-started.  The funding efforts captivated the entire country, money poured in, in however small quantities people could give.  The World’s circulation exploded, and at one point enjoyed the honor of being the most widely read newspaper in the Western hemisphere[iv].

There’s a fantastic and historical poster from the American Committee in charge of the construction of the Base and Pedestal, which solicited donations in the following way, “Every American citizen should feel proud to donate to the Pedestal Fund and own a Model in token of their subscription and proof of title to ownership in this great work.”  What’s even more intriguing is that they used a two-tier ‘perks’ approach, $1 scored you a 6″ statuette, and for $5 you got a 12″ statuette.[v]

Sometimes, when you have a dream, it takes an inspired crowd to help make it a reality.   We feed off of your hard work, vision, energy, momentum, and at times the multi-tiered perks strategy!

According to the late Peter Drucker, “Every few hundred years in Western history there occurs a sharp transformation. … Within a few short decades, society rearranges itself — its worldview; its basic values; its social and political structure; its arts; its key institutions.  Fifty years later, there is a new world.  And the people born then cannot even imagine the world in which their grandparents lived and into which their own parents were born.”[vi] This is a book about such a transformation.

Come with us on a ride through time.  It illustrates the diminishing function of conventional venture financing mechanisms, vital to an understanding of the emergence and value of crowdfunding.  The ride then travels through the current crowdfunding landscape, and ends up in a vision of a powerful new social and economic future.  Many of you helped shape this ride and we hope many more will do so along the way.  We deeply hope you are inspired, and become part of what makes crowdfunding’s future great.


[i] Wikipedia (2010) at http://en.wikipedia.org/wiki/Crowd_funding.

[ii] Internet World Stats (2010) at http://www.internetworldstats.com/stats.htm.

[iii] Neatorama.com, “The True Story of the Statue of Liberty” at http://www.neatorama.com/2007/05/31/the-true-story-of-the-statue-of-liberty/.

[iv] Neatorama.com, “The True Story of the Statue of Liberty” at http://www.neatorama.com/2007/05/31/the-true-story-of-the-statue-of-liberty/.

[v] Antti Hannula (2010) at http://hbe.fi/gasellit/statue-of-the-liberty-was-crowdfunded/.

[vi] Peter Drucker (2009) at http://www.postcapital.org/2009/01/09/the-post-capitalist-society/.