Crowdfunding: how to take it to next level

DIY sites, backed by government to nourish startups

By Kang Ye-won

A recent project at FundU raised 500,000 won for a group of over 70 year olds to teach them how to read and write. In return, a dozen anonymous supporters will get hand-written letters from the recipients.

Another event aims to raise 50 million won to stage a concert for 20 to 30 year olds in an effort to inspire political interest among them. Sponsored by several celebrities including Korean rock band YB and comedian Kim Jae-dong, it brought in 11.58 million won from 70 donors within days.

Both projects were successfully launched on FundU, a domestic crowd funding site that took off last year.

Crowd funding means people choosing to raise money through the Internet to fund projects they want to succeed.

Most do-it-yourself campaigns remain viral goodwill rather than solid funding sources.

“In Korea, the concept of social funding is not widely accepted yet and most projects often rely on people who the creators already know,” said Park Beom-woo, a FundU manager.

“Unlike social issue concerts supported by celebrities, project directors are burdened with spreading the word. In reality it’s difficult for an individual to raise enough money without outside help,” Park said.

How it works

Nonetheless, crowd funding is a rapidly growing field.

The market size jumped nearly three-fold last year to reach $2.9 million from a year ago, according to data collected by FundU. The global market is projected to be $5.8 billion by next year.

The way it works is every project creator sets a funding goal and a deadline on a website. They range from indie artists who would like to release their debut albums to cause-motivated campaigns and tech startups launching the next cool apps.

If the project succeeds, the total amount of pledges is transferred to the project directors, and in return they can thank the supporters with personal rewards such as an album or thanks in film credits. No monetary rewards are allowed.

Currently, about 12 other local crowd funding sites exist including Tumblebug and GOODFUNDING. Their main mission is to support ideas and help projects come to life.

Other companies such as MoneyAuctions and popfunding are similar ways of providing crowd-financing platforms except that the organizers ask to borrow money which supporters will later have returned to them.

FundU makes a profit from a relatively small amount of commission from the two options given to users: keep-it-all and all-or-nothing.

The first is when the creator keeps the total amount of funding even if the project falls short but the company takes a 15 percent of commission.

The latter is when a participant can only collect the funding if the project meets the goal and a lower fee of 9 percent is charged.

Although the concept of getting a crowd to simply raise money for a cause or invest in local business is nothing new, the powerful social networking sites Facebook and Twitter played a crucial role in nurturing the niche market led by U.S. companies such as Kickstarter and IndieGoGo, among others.

Kickstarter, a New York-based, frontrunner in crowd funding, has collected over $20 million in pledges for 20,000 projects successfully funded since its launch in 2009.

IndieGoGo, a San Francisco-based startup launched in 2008, is less commercial yet offers more cause-related projects such as a teenager’s plea to raise money for his college tuition.

Government backing

The American sites have hope of further expansion thanks to the recently passed law called Jumpstart Our Business Startups Act or JOBS Act, which encourages entrepreneurs to use crowd funding to bring in more investment.

The new legislation allows small entrepreneurs to raise up to $1 million and larger companies can offer up to $50 million in stock value without registering with the Securities and Exchange Commission to avoid regulation.

The policy also promotes startups to take them to Initial Public Offerings (IPOs) by exempting them from some of the SEC regulations in the first five years after the IPOs.

On a similar path to creating jobs here, Finance Minister Bahk Jae-wan said in a statement the government is planning to pass a similar law by next year, during a ministerial meeting on May 1.

No officials were available for comment on the proposed legislation.

“As part of the government’s effort to nurture social funding, if it can provide financial support for startups, we expect many technology-related projects with potential to rapidly grow,” said Park with FundU.

“Social funding or crowd funding is neither a charity nor an investment. It should be able to overcome the (Korean) people’s resistance towards making donations. It’s a communication channel through which to share one’s dreams and success,” he said.

But some experts say private investment is the way to job creation and sustainable economic growth rather than through a public-assisted program.

The lesson from the U.S. JOBS Act for the Korean economy is solving economic problems through capital markets, said Kim Kab-lae, a research analyst with Korea Capital Market Institute.

“In my view, a more realistic and sustainable approach to promoting Korea’s economic growth is to boost corporate financing through the ongoing policies of private equity funds and creating a stock market for promising small companies,” Kim stated in a research note.

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