In 2012, crowdfunding for entrepreneurs / startups rose to a whole new level. This latest update from Kickstarter, 1 of today’s 700+ global crowdfunding sites/platforms, gives some food for thought. [For a more entertaining take, read the 100+ comments on Fred Wilson's Blog. Some good stuff there.]
Over the years, crowdfunding has grown well beyond the traditional donation-based model (philanthropical purposes – charity, disaster relief, political campaigns, musical bands, etc) to include additional funding models such as:
- Money for products/services (money pledged on a per-project basis and, maybe, even a goal-basis)
- Equity-based (buying ownership stakes in the startup)
- Lending-based (non-bank lending that requires repayment)
- Reward-based (rewards / deals for investment)
The last publicized research from Crowdsourcing.org stated:
As of April 2012, based on Crowdsourcing.org’s Directory of Sites, the most complete database of crowdfunding sites, there were 452 crowdfunding platforms active worldwide. The majority of them are in North America and Western Europe. Together, these platforms raised almost $1.5 billion and successfully funded more than one million campaigns in 2011.
[Note that this included all 5 of the above models and is still being debated widely.]
Two Much-discussed Aspects of this Mega-trend
One - The US JOBS act, which was signed into law in April 2012 by President Obama and will be implemented this year, will include legislation / regulation to open doors for even more debt and equity investors with fewer restrictions. Per Tanya Prive of Forbes (and formerly co-founder of the original RockthePost platform for entrepreneurs), Crowdfunding Capital Advisors, an industry consultancy firm will be releasing a report in September 2013 that shows the debt and equity crowdfunding space to be at least $4.3 billion in its first year of operation.
So, all this is, of course, yet another turn of the tide for creative and entrepreneurial free agents, providing more options to take their ideas to fruition beyond the difficult routes of bank loans, venture capital funding or angel investing. Just look through the many crowdfunding sites and you’ll see many, many examples.
Two - It is also driving the emergence of a new kind of consumer. Trendwatching goes so far as to predict that this will be the top 2013 mega-trend: a new, savvy, demanding type of consumer – the “presumer”. Their definition is as follows:
In today’s EXPECTATION ECONOMY, consumers want the best, they want it now and first, and they want real, human connection, too.
In fact, they demand all that. Thanks to crowdsourcing platforms and new manufacturing technologies that are finally tipping into the mainstream (and a cult of entrepreneurialism at large), consumers are increasingly PRESUMERS; able to satisfy those demands through engagement with products and services pre-launch.
Whether it’s all about the perfect product, or the excitement of being a passionate supporter, PRESUMERS love to get involved with, push, fund, and promote products and services before they are realized.
[See their 1-minute infographic here.]
What of the Rest of the Slowly-emerging Iceberg?
Trendwatching did a great job of defining the presumer, identifying their drivers and providing examples of their investments. But, it takes more than just a startup idea person and a money person to bring a product to life. So, it got me wondering about the entire crowdfunding ecosystem and how that’s going to evolve as well. No doubt, there are already academic and thinktank studies underway to shed light on this very topic. I simply want to explore somewhat unscientifically here with you, my free agent friends, to see if it triggers any opportunistic ideas for us in our businesses / ventures / startups.
My hypothesis, if you will, is that there are multiple related crowdfunding ecosystem components (which, in turn, have their own ecosystems) that will also need to adapt / evolve to accommodate the forecasted growth. Potentially, it’s going to be like a giant domino effect across the entire economy if the growth is to the extent that market pundits are forecasting. And, of course, those changes across multiple ecosystems will create new sets of opportunities and problems within each. Some initial examples below:
Regulators – Both SEC and FINRA are grappling with how to create/enforce financial regulations around equity-based crowdfunding that protect the investor and monitor / punish any violations, malpractice or fraud. By all accounts, this is not proving to be easy. Despite the SEC’s dithering, the general consensus seems to be that small businesses are going to get innovative ways to raise capital this year due to crowdfunding.
Legislators – In addition, there will be legal aspects to be addressed related to IP protection, patent disputes, disclosure requirements, etc. Given the degree of transparency that is required for an offering seeking crowdfunding, this has proved to be very thin skating ice for some startups already. Entrepreneurs seeking debt or equity crowdfunding are being advised to “lawyer up”.
Lobbyist Groups – Where there is a new or growing need for regulation and legislation, there will also be additional lobbyism. For example, California-based ProFounder, was recently forced to cease operations by state authorities who said that they were acting as a broker without being licensed as a broker dealer. Profounder is now lobbying for a change in regulatory rules. There was even a Crowdfunding Conference recently bringing various groups together to discuss their top 10 issues.
Target Industries – Up till recently, most crowdfunding firms have focused on creative, art-related endeavors such as music, movies, game development, writing, artwork, handicrafts, etc. This is not new – think of it as the modern version of the age-old practice of patronage where richer people, seeking pleasure or karma, supported artists whose art they enjoyed (in our contemporary times, instead of “patrons”, we have “fans”). Or, consider the ongoing rewards/deals that larger businesses bestow on loyal customers. Now, sophisticated technology-driven platforms / portals have further opened up both those models to smaller investors and smaller businesses. At the same time, they have also enabled equity-based and lending-based models in industries and markets where, traditionally, institutional financing, venture capital and angel investing have ruled. I particularly like some interesting new industries / markets that are getting funding these days, for example:
1) Escape the City in the UK, funded by Crowdcube – helping professionals with career transitions
2) Lucky Ant - the first hyper-local crowdfunding site, NYC-based, that helps local retail Mom & Pop shops achieve specific growth goals by giving people the opportunity to invest in them in exchange for deals and perks. I hope it goes global. It seems to be a much better growth model than Groupon or LivingSocial.
3) Makeably – This is a marketplace for custom-made design objects from clothes/shoes to household goods. Buyers can search and select a design, request customization, finalize price and delivery and then the designer manufactures and delivers. From what I can tell, prices are reasonable but I have not bought anything to be able to speak of quality.
Incumbent business owners in target industries – So, what does this mean for you if you are already in a particular industry or market and a crowdfunding platform has brought a whole new set of competitors? For one, you could think of joining them and getting your own piece of the pie. Or, you could think of offering the fund-seekers your services / support – for a fee, of course. For example, if you own a store that sells musical instruments, I wonder if you could find some local musicians on Kickstarter who are trying to get funding for their next album, offer your store as a venue to showcase their music to live investors – all for a small fee, of course. Or, if you sell / make handmade art / craft, could you team up with a designer seeking funding to help them manufacture and deliver their custom-designed items? Or, what if, as a marketing content creator, you offered to create persuasive content/copy for the fund-seeker to be able to stand out in the hundreds of applicants on these sites? You see where I’m going with this. There is a world of possibilities once we start thinking of these fund-seeking startups on various crowdfunding sites as potential customers.
Academia – A short while ago, I read somewhere that a few higher education institutions have already started incorporating crowdfunding into their curricula. Makes sense, when they teach about other kinds of debt and equity financing and funding. And, of course, there are various think tanks and research organizations (some linked throughout this post) already conducting detailed studies into the ongoing trends, related financial and behavioral economics and how to drive policy-making, socio-cultural changes, etc. So, this opens up a whole new area of academic specialization for people seeking academic careers in emerging fields.
Personal Finance – The financial industry is awaiting regulation / legislation from SEC and FINRA. In the meantime, financial advisors of all stripes are getting asked about peer-to-peer lending (e.g. Lending Club) and crowdfunding as potential alternative investments, particularly in emerging countries and markets. It will be interesting to see how investment advice and practices (e.g. portfolio allocation, portfolio management, etc.) will adapt to incorporate these types of investments. And, what sorts of financial models will have to be developed to monitor and manage risk / return. Certainly, forward-thinking financial institutions and advisors will need to start thinking about this more deeply very soon.
Journalism / Popular Media – There is a lot the average investor / presumer wants and needs to learn about crowdfunding. A few dedicated sites (e.g. crowdfundingnews, crowdsourcing.org, crowdfunding-website-reviews, Daily Crowdsource) have sprung up, but we’re just at the beginning here, I believe. Given that the audience is the masses rather than a select group of institutions or small set of high-net-worth investors, how they will want to consume their ongoing news about crowdfunding evolution, growth, successes, failures, specific campaigns, etc., will dictate how journalists and popular media adapt to meet their needs. It would not surprise me in the least if there is already a reality show in the works too.
Other Resources:
Books – A quick keyword search on Amazon shows 121 books thus far on crowdfunding. A very small list indeed. As there are more success stories, we can foresee more how-to books, memoirs, etc., to start showing up as well.
Experts for Hire (coaches, consultants, advisors, lawyers, etc.) – Whether it is the art of creating winning fund-raising campaigns or the art of selecting and investing in winning campaigns, there is already a slowly-emerging set of experts to provide the much-needed advice, consultancy, navigational guidance, etc.
Industry Associations – Another emerging group of resources, these are part-lobbyists, part-thinktank, part-peer-networking. They cater to and are tailored differently for entrepreneurs, investors and the platforms themselves. Crowdfunding Professional Association, CrowdFund Intermediary Regulatory Advocates, National Crowdfunding Association.
Technology – This has been, of course, the engine for crowdfunding growth. So far, this technology has focused on the actual development of crowdfunding platforms. However, we are slowly beginning to see growth of other technologies to enable additional functionality such as:
- Picking the right crowdfunding platform from the multitudes – e.g. crowdsunite.com
- Measurement & Analytics dashboards for startup due diligence, progress tracking, success metrics, etc.
In Closing
Before I became a free agent, I tended to read the typical “Top X Trends for the Year” with maybe a little more than an intellectual curiosity. Now, however, I find myself reflecting differently on these forecasts. I hope that, similarly, this post on 1 specific trend has sparked some ideas for you if you’re an entrepreneur, small business owner, freelancer or independent professional.
So, a few questions as food for thought.
Do you see a way to leverage crowdfunding – directly or indirectly – for your business / venture / startup? If not, why not? If yes, how?
Have you invested – are you a “presumer”? How was/is your experience? What dos and don’ts would you share with other potential investors?
Are you part of one of the related ecosystems discussed above? How do you see your existing business/venture being impacted as a result of the related potential changes? How do you intend to capitalize on some of those changes?
I daresay we will return to this topic in coming months. I would love to get your thoughts and start a discussion going here amongst us. Over to you.
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