“Fan financing,” or “Crowdfunding” as it is often called, is a new financial instrument for funding entertainment projects online by attracting large affinity groups, or fans, to a Web site and capitalizing on their interest in a company or specific project in order to fund it. It typically involves a massive number of online fans, each of whom can purchase a small incremental interest, or participation unit, in an entertainment project in order to fund it.
Fan Financing brings two groups together:
1- Entertainment companies that desperately need new capital for highly risky investments in movies, record albums and NASCAR teams, and,
2- Their fans that desperately want to be part of the action.
Fan financing, or crowdfunding, is already being used by a wide variety of online companies worldwide. For example, www.Sellaband.com and www.SliceThePie.com offer music fans the opportunity to invest in up-and-coming BANDS seeking funding for their next album. On these Web sites, a band posts a demo of their music that they would like to record professionally. If a fan thinks the band’s demo has promise, he or she can pay as little as $10 and buy a participation unit in the band and later receive a free download of the band’s album when it is released. The fans thereby fund the albums they want to hear, by buying them before they are made.
In addition to receiving their free album as a dividend, a fan’s “investment” in a band also entitles them to also receive some interactive benefits during the making of the album such as video downloads of rehearsals, printable autographed pictures, a free download of the band’s music video, contests to meet the band in person, or sometimes feedback to the band through online voting. A fan is also offered cash dividends from their band’s earnings, if it is successful. But perhaps even more importantly, the fans receive the tremendous satisfaction of knowing, that even in a small way, they are partly responsible for their band’s success.
What does the band receive? Most importantly: funding! No one need mention the difficulty (and cost) of launching a new band in the current market. However, even with major music company backing, many bands often die on the vine, never to be heard from again. With fan financing, once a band is funded, it has a following…a massive following…and one that can certainly be monetized. Do you think for a moment that these fans that financed “their” band won’t buy a hat or a T-shirt? Do you think they won’t buy tickets to “their” band’s local concert? In short, what the band has received is instant loyalty from a massive number of their online fans that have a vested interest in, and a desire to share in, their band’s ultimate success. It is therefore a win-win scenario for both parties.Another VERY important element of this scenario is that with fan financing no one loses! The band gets a bunch of fans and the money necessary to please them. The fans get a product dividend (the album) that is worth their small investment. So even if the band’s album never reaches the top ten, or even fails to return the original investment necessary to make the album, neither party goes away completely empty-handed.