Patreon, Crowdfunding goes subscription

What do artists like Leonardo da Vinci, Michelangelo, William Shakespeare and Joseph Haydn have in common? They were heavily dependent on incredibly rich patrons to finance their works throughout their careers. Over time, with the rise of capitalism and ubiquitous increases in standards of living, this practice of patronage for the arts (among other disciplines) continued to diminish. Despite this, the Cold War-borne conflict of ideologies still provided incentives to sustain ever increasing material throughput. Thus we observed the creation of entities such as the Bureau of Educational and Cultural Affairs (formerly the US Information Agency) and the British Council among others. The arts were not yet dead.

The 90s changed everything. The Cold War had ended and so we lurched headfirst into more extreme versions of capitalism without realizing the need for balance. Most importantly, we saw the advent of the Internet in the mid-90s. Anybody that isn’t living under a rock is aware of how the Internet fundamentally changed our daily lives and even the way we think. Countless business models such as that of the printing press became obsolete over time. The mass digitization of books and music, and easy access to media content created an immense downward pressure on prices. “Cost-rationalization” was everywhere. All of this combined  resulted in  an environment where we’re essentially surrounded by junk in the mainstream; we no longer have the same kind of “movements” that were so common even two decades ago (click links for examples).

We can all acknowledge this contemporary cultural deficit is something we’d all prefer to have a solution to. And yet, most people can’t even begin to point to what, if anything, can be done about it. These failings of the free market ultimately contributed to the birth of the crowdfunding industry. Led by pioneers such as Kickstarter and Indiegogo, the industry rapidly grew from $2.7 billion in 2012 to $34.4 billion as of 2015. However, this movement failed to maintain its momentum for several reasons.

Back to Basics

In order to move forward with this discussion, we’ll need to go over what the business models of these traditional crowdfunding companies are in the first place. For the sake of simplicity, I’ll use the umbrella term of “entrepreneur” so as to include artists, scientists, engineers etc. Websites like Kickstarter and Indiegogo are essentially platforms that allow entrepreneurs on one side to connect with everyday consumers as potential donors on the other side. Entrepreneurs can start their own “campaigns” for certain products or projects for which they require funding. These funds are expected to go into further product development and help cover any expenses that would otherwise be very costly for the average startup. Most campaigns have a funding goal set by a certain date. With these campaigns in place, people could simply visit the website and donate to the campaign that appeals to them the most. The value proposition to potential donors is that they stand to receive “rewards” for the amount they contribute to a campaign; the content of such rewards vary from campaign to campaign. The crowd funding websites themselves ultimately make money by taking a cut (usually around 5%) from the total contributions to a campaign.

A glaring flaw to this approach is that the contributions made to these campaigns are in the form of a one-time lump-sum payment designed to finance only one project. Therefore, an entrepreneur may find success in reaching his funding goal for his first project but might end up struggling to build momentum again for his next one. The sheer barrage of campaigns didn’t help either. On the other hand, campaigns that got the most attention were not necessarily ones that merited it. The crowdfunding industry had ultimately failed the very people they had meant to help.

A New Approach

Thus a new approach had to be taken to support these cultural entrepreneurs- rather than investing in projects, people had to invest in the entrepreneurs. Since the private sector clearly won’t be investing into the promotion of what is otherwise priceless culture, the phenomenon of the cultural deficit implies a societal demand for a mechanism that facilitates the support for such entrepreneurs. And so subscription-based crowdfunding was born. Lump-sum contributions to a campaign are discarded in favor of courting subscriptions that require smaller but more frequent donations. With an established loyal fan base, a campaign is more likely to have a stable source of finances in larger volumes.

Initially pioneered by Subbable, a creation of Hank and John Green (of VlogBrothers fame), this niche industry of subscription-based crowdfunding is now the exclusive domain of Patreon. Subbable has since been subsumed into Patreon through an acquisition in early 2015, taking advantage of the winner-take-all dynamics characteristic of the industry. Since Subbable already had content creators with high name recognition, the acquisition had allowed Patreon to significantly grow its subscription base, aka “patrons”, on the website. It should be noted that content creators receive 92% of incoming funds: 3% goes towards processing fees to cover merchant services i.e. Paypal while the remaining 5% is paid to Patreon itself.

Current Trajectories and Predictions

Patreon continues to pursue venture capital financing to ensure entrepreneurs i.e. content creators are getting paid. And a lot of its more high-profile content creators are doing incredibly well for themselves. However, the way Patreon is designed only ensures the success of entrepreneurs that already have pre-established fan bases. If, on the other hand, you’re an ambitious entrepreneur looking to start your business and trying to court money from strangers, tough luck.

An obvious remedy to this core issue of discoverability is the development of some kind of recommendation system on its platforms. If you’ve ever used Facebook or YouTube, you know what this is. You click, you see more stuff “you may also like” that is “recommended for you”, you click some more (or maybe not). The point is that a recommendation system allows you to discover content you may not have otherwise found on your own. That would greatly benefit a platform like Patreon where most patrons are actually looking to support genuinely talented people. In other words, a recommendation system on Patreon will significantly increase the establishment of new relationships between content creators and patrons. Furthermore, a recommendation system will induce patrons’ willingness to pay since they are directed to content they’re more likely to want to support anyway.

Whether or not Patreon will develop such capabilities in-house is hard to tell. Patreon has at least 50 employees. Using a bit of back-of-the-envelope math, profits (excluding salaries among other labor costs) as of September 2015 can be estimated to be just exceeding $1 million. Dividing that figure by 50 employees, it can be assumed that each employee is earning a maximum of $20,000. The real figures may well fall short of $20,000 per person. Despite all this, it’ll be well worth Patreon’s time and money to incur higher short-term costs in developing a recommendation system. 

Does Patreon need more venture capital financing to stay afloat? Maybe not. A company like Patreon may determine that they’re in need of a “big brother” i.e. a more experienced, usually larger company. This will most likely be something like Facebook. Facebook has already developed machine learning algorithms that regulate its news feed which, together with its abundance of potential patrons, looks especially attractive to Patreon. The key issue, however, will be that a company like Facebook, by virtue of being more experienced, may drive a harder bargain in negotiating any such partnerships with a smaller company like Patreon. So far, Patreon is still going it alone but, without additional innovation on its platform, it too risks obscurity like its predecessors.

Is Patronage Dead?

If you managed to make it this far down the article, the answer is an unconvincing no. No, because we clearly have a mechanism in the form of subscription-based crowdfunding that allows us to support our favourite entrepreneurs directly and more sustainably. Unconvincing, because,  there is only one firm that is the entire industry and its financial health is questionable at best.

Multiple solutions exist to such a problem. You can start your own company that attempts to compete with Patreon in the niche industry. You could spread awareness and inform all your friends about how Patreon is so revolutionary and avant-garde and get them directly supporting their favorite content creators. You could start a movement to pressure your local legislative authorities into supporting and incubating such companies or creating its own version of Patreon. The list goes on. But if we are to help bring about the next Michelangelo or Haydn or Bach, this may well be the way forward in the era of the Internet.

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