Power in Numbers

Thanks to crowdfunding， Zhang Dawei saw his dream come true. A DJ with a Beijing radio station during his days， Zhang spent nights staging his musical Oh！ MGod at The One Theater in Loft 718， a media and creative industry park in Beijing.

A diehard fan of Michael Jackson， Zhang planned to produce a musical commemorating the late King of Pop two years ago， but failed. He refused to give up and resumed his efforts this year. Even though every member of his cast and crew worked for free， he still needed to raise 25，000 yuan for rehearsal space rental and set construction. Zhang began fundraising on Zhongchou.cn， one of China’s biggest crowdfunding websites. In a month， he had amassed 30，750 yuan from 117 investors. In return， the investors were rewarded with T-shirts， DVDs of the musical， or tickets， depending on the size of their contributions. Zhang’s story is typical， and many others have realized dreams via crowdfunding.

Crowdfunding Craze

Internet-based mass fundraising has become increasingly popular in recent years， helping small businesses and individuals obtain initial capital. The concept is playing an increasingly important role particularly for tech startups. “Today， people admire technological innovation，” explains Sun Hongsheng， CEO of Zhongchou.cn. “However， many small tech startups lack funds， social connections， and sales channels. Crowdfunding can help solve all of these problems.”

Soon after U.S. crowdfunding pioneer KickStarter.com broke out， similar websites began sprouting in China. In 2011， China’s first crowdfunding site， Demohour. com， was founded， followed by Zhongchou. cn， Dreammore.com， and Tmeng.cn. Currently， the country has dozens of crowdfunding sites. The scope of crowdfunding projects has constantly expanded， ranging from charity to smart devices and movie production.

The 2014 Report on China’s Internet Finance Market released by the Internet Society of China shows that in the first half of 2014， a total of 1，423 crowdfunding projects were launched in China， raising funds totaling 190 million yuan （US$ 30.8 million） from 109，000 investors. Crowdfunding has already become mainstream in China， attracting many internet giants to“pan for gold” in the crowdfunding market.

On July 1， 2014， JD.com， one of China’s largest e-commerce companies， launched a crowdfunding platform. The first generation of its crowdfunding projects included a DSTB （digital set-top box） receiver， a concert， a short film， and publication of a book. A week later， another tech giant， Suning.com， launched a quasicrowdfunding platform integrating design， service， and media resources， aiming to promote creative products.

Earlier this year， China’s internet giant Alibaba Group launched Yulebao. Although Alibaba announced the site as an online financial product， Yulebao’s business mode is similar to crowdfunding. The recent movie Tiny Times 3.0 utilized crowdfunding， which reportedly raised 13 million yuan via Yulebao for the produc- tion. Furthermore， Taobao.com， an e-commerce site under Alibaba Group， renamed its Dream Channel as Taobao Crowdfunding. In April 2014， Baidu， the country’s largest search engine， also launched a crowdfunding platform.

Overseas crowdfunding giants are also trying to grab a piece of China’s market pie. Australia’s largest crowdfunding site， Pozible， is beginning to focus on China as its primary demographic. The first Chinese crowdfunding project launched on Pozible was a smartwatch， which raised more than a million yuan.

C2B Revolution

Technically， the primary function of crowdfunding is raising capital. For tech and art crowdfunding projects， however， their primary goals have shifted from seeking seeders to publicizing products and surveying market demand.

In a time when consumers are more eager to express their demands， their direct influence on producers has grown considerably. In the traditional commercial pattern， if a mass-produced product isn’t as popular as expected， the manufacturer will suffer great losses. However， crowdfunding enables producers to invest less in the primary stage and let the product reach mass production only after crowdfunding proves it popular， thus avoiding major losses and reducing risk. Crowdfunding is a revolutionary development for the consumer-tobusiness （C2B） business mode. “We want to move the e-commerce platform up in the industrial chain so it precedes mass production，” illustrates Jin Lin， who manages JD’s crowdfunding platform. The goal is letting consumer demand play a key role in product design.

Due to crowdfunding’s role in sales， some consider it akin to group buying. In the eyes of Sun Hongsheng， the reward of contributing to a crowdfunding project is not a tangible good or even a price discount， but a sense of participation. “The joy you get from purchasing something is transient， but it lasts much longer when participating in crowdfunding，” he asserts.

Growing Pains

China’s crowdfunding market is still young and lags behind its U.S. counterpart both in size and influential results. In the first half of 2014， the U.S. crowdfunding market raised US$ 215 million， about seven times that of China. Moreover， the United States saw 5，513 crowdfunding projects launched， which attracted 2.8 million investors – both figures surpassed China by a great margin.

Due to its low threshold， risks of crowdfunding are emerging. According to Sun Hongsheng， two bottlenecks hinder the development of China’s crowdfunding market： Domestic crowdfunding projects often lag behind in technological innovation， and China lacks a mature investment environment. Crowdfunding is like venture/angel investing， which requires investors to have the capacity to absorb losses. Moreover， as a business mode recently introduced from abroad， online crowdfunding faces legislative deficiencies in China. According to the country’s current laws and regulations， bond and equity crowdfunding is stiffly restricted.

Industry insiders attribute the rapid development of crowdfunding in the United States to its strong credit environment. But， crowdfunding projects don’t easily win the trust of investors in China， while the country lacks a credit system. This not only requires the government to formulate and enact relevant laws， but also requires crowdfunding sites to establish and strengthen their oversight system for project launchers.

Despite the growing pains， online crowdfunding will continue maturing. The World Bank estimates that the global crowdfunding market will reach US$ 300 billion by 2025， of which US$ 50 billion will come from China. Just like group buying websites in 2009 and P2P websites in 2011， crowdfunding websites are teetering on the brink of explosion in China this year. “The tremendous population of China will create a perfect environment for the development of crowdfunding websites，” opines Sun Hongsheng. “As a representative mode of internet finance， online crowdfunding has an enormous room to grow. We have good reason to believe that crowdfunding will generate a market of 100 billion and even 1 trillion yuan in five years.”