How Crowd-Funding Is Changing Online Business
By Alexander Kozlowski
There is that urban myth about a programmer who wrote a program for a bank, where for every transaction done, a deposit of one cent, I think it was US cents, into his own account. Eventually he had millions but unfortunately for him he was caught and imprisoned. I am not sure if the story is true or not but the point of the story is that he used minimal amounts on a large scale to make millions in a very short time period.
The other day, through random surf around on the Internet, I discovered that there is a growing online trend, the concept of crowd-funding. Perhaps it is not such a new concept as politicians have been doing it for years to raise funds, even charities or entrepreneurs do it. However what is new, at least for me, is that it derives from crowd-sourcing or user generated content, which involves allowing work, or in this case investing, to be outsourced to the masses or particular groups of individuals therefore making crowd-funding one part social network and one part capital accumulation or fund raising. What makes this even more interesting is that it is being used as a business model.
Essentially the model includes many micropayments, done via supporters, or as some entities call them micro-investors, who all donate or invest a small amount into a concept or product which will eventually, pay off if enough people provide the determined amount. If the determined amount is not reached there is no payoff to anyone which can make it a bit of a gamble. Should the amount be reached all the investors are rewarded in some manner, either in a cut of the total future sales or provided with goods or services exceeding their initial payment. Crowd-funding entities seek to harness the enthusiasm as well as the cash of strangers, usually from the Internet, by promising them a cut of the returns (the incentive) which, in my opinion, is similar to concepts found in gambling where a higher risk equals a higher payoff usually.
Although this concept is not particularly new it only seems to be appearing around the web now and is starting to become quite mainstream and socially acceptable. This business model appears to be growing and soon we will see a lot more businesses adopting this model, especially due three main factors:
- The World Wide Web has become a global phenomenon connecting more and more people on a daily basis; the perfect medium for communication across the globe.
- Increasing trust and convenience of moving services online. For example people are less worried about entering their credit cards online or people prefer to check their accounts online, etc...
- Global recession; Due to the financial recession of 2008 it is more likely to be a more cautious behaviour towards to new investments or payments. This might contradict my previous factor however it doesn't necessarily as it could encourage people to diversify their investments across many portfolios which lends itself well to crowd-funding.
In conclusion, crowd-funding might still be in its enfant stage, it is set to grow especially as it is a simpler and potentially faster method for raising awareness or money. I don't expect it to become a global phenomenon overnight as it is not ideal for every business or initiative; however it will slowly become more and more widespread, especially with more tech-savvy users.
Currently it is primarily based on fund raising but it could evolve to include more than monetary gain, such as opinions or exchanges for other services. Which ever the case, it is definitely focused on the commercial usage of communities where each individual can become a participant and part owner of ideas, goods or services.
Some illustrative examples websites worth taking a look at:
Crowd-funding can be applied to any industry; as long as there is a community and a need there will be all sorts of crowd-funding initiatives appearing. Take a look at the following examples to see what I am referring to.
Probably my favourite crowd-funding website, aimed at Inventors and Product Designers who get their chance to market their products via the 'social product development tool' which essentially is a community of users who vote, discuss and critic any ideas submitted. All submitters need to contribute $99 but in return they get great opportunities, ideas, reviews or even threats.
This might not appear to be the traditional crowd-funding website but the community support appears to be very good which allows an inventor to learn about the market's requirements quickly as well as exposing their ideas to a large audience. Additionally, Quirky claim to provide an easy transition from any successful idea into manufacturing which might hamper a lot of designers.
Sellaband is a 'fan funded music' website, which is based in Amsterdam, Holland and Munich, Germany. It has been operating since 2006. The website allows music lovers to connect with unsigned artists looking to record albums. It allows another way to bypass the record labels, which is great news for indie label lovers.
Musicians have profiles with biographies and songs. The musician is required to sell 5,000 shares, at each, where they are allowed to enter recording studios.
If you have invested in a band who succeeds at obtaining a record detail all investors will be recorded with either free band merchandise, music or even a split of the future revenue.
Cofundos is provided by the University of Leipzig, Germany. It provides users to submit software requirements and ideas, which are sustained with bids. Developers are then invited to read these requirements and if they decide the idea and requirements are feasible they request to perform the work, bid. Once all list of developers are realised the community who initiated the idea or requirements decide on developer who will perform the work.
Once the developer has completed the project the submitters will determine, via a majority, if they successful and that the end product achieve the original goals. If this is the case the developer receives the pot of money.
It may seem quite lengthy and strict but I would imagine this is to protect the bidders from receiving their goals. Software houses might consider this model moving forward in attracting the correct talents and reduce time to market on new projects.
Founded in 2008, IndieGoGo is more a generic fund raising website aimed to utilise their existing community to help people with any project, which can be anything such as a cause, a film or really anything to reach their threshold by a defined particular timeframe. IndieGoGo charge for 4% of the total raised amount if you reach your threshold or 9% if the threshold is not reached.
Each project or initiative has their own rules and policies where some don't even necessarily reward their contributors. This appears to be the more generic crowd-funding website that I have seen yet but definitely has the widest range of initiatives.
About The Author
I hope your enjoyed the article. However it would be great to see what your thoughts are. Let me know your thoughts by emailing me at alexander.kozlowski[at]exoriam.com
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