The Power of Crowdfunding
jmvolio 270005N6KM Visits (2219)
Imagine for a second that you are an aspiring entrepreneur with a beautifully designed concept but without the resources necessary to begin mass-producing your product. Debt is risky, sources of funding limited, and the competition is widespread. If you received an email telling you there is a way of using the internet to not only market your product but also to raise 1,000% of the initial funding required to produce it you would not take long to mark it as spam. That would be a huge mistake, as companies like Kickstarter are delivering such outstanding results for new ventures through the use of crowdfunding.
The concept of crowdfunding comes from the idea of having a lot of people collaborate to fund projects of various natures usually helped by the internet. Crowdfunding has been used to support a very wide range of projects, ranging from relief works for natural disasters to international tours for rock bands. According to the Crowdfunding Industry Report, crowdfunding platforms raised almost $1.5 billion in 2011, and with current growth trends the market is set to double such amount by 2012.
The overall market is divided into four types of platforms:
· Equity funding
· Reward (pre-sale model)
The internet facilitated the creation of this new form of financing by allowing people with the same interest to easily connect and safely fund the projects of their choice. The next step in such a collaborative effort: social media. Social media has taken the concept of connecting online to the next level by actively allowing users to engage with each other and constantly share their interests and thoughts.
A variety of websites are leveraging the power of social media to promote the funding of their projects. One of the most recognized companies that has been successful in doing this is Kickstarter.
Case Study: Kickstarter
Kickstarter is a rewards-based platform that allows entrepreneurs to get the financing they need to develop their products or projects. The way the site works is by allowing a person to submit their project, the amount of money needed, a video describing the product and different reward levels for backers: the more money paid, the better the rewards obtained. The side is used by designers to fund the first batch of their product, allowing the backers to be the first to receive it, and by artists looking to film a new movie or record a new album.
According to the company, 44% of the projects submitted on the website succeed in getting the funding they need. This success rate might not seem high, however, the usual reason for projects to fail is poorly designed campaigns. A report by Jeanne Pi and Professor Ethan Mollick of The Wharton School of Business analyzed some of the factors behind succeeding on the site.
One of the most influential categories was named “The Power of Facebook Friends of Founders”. According to the report, for an average $10,000 project, a project creator with 10 Facebook friends has a 9% chance of success, compared to one with 1,000 Facebook friends who has a 40% chance of success. This is a clear indicator of the power of social media combined with social business. It allows for projects to spread across networks quickly and, hopefully for the creators, become viral.
One example of the power of social networks is the most successful project ever on Kickstarter: the Pebble e-paper watch. The watch is designed to connect to smartphones via Bluetooth, allowing users to receive notifications about calls, emails or reminders on the watch. Additionally, the interface and operating system are open and completely customizable. This project went viral across tech blogs and social media sites, allowing to it raise $10,266,846 even though it was only seeking $100,000! At one point the project was capped, given that they would not be able to meet delivery dates with the amount of backers coming per day.
Clearly crowdfunding is an exciting idea for aspiring product designers and entrepreneurs. But how can business use it in their advantage? Furthermore, how can they take advantage of their social media efforts to combine the two?
Part of the excitement of contributing to crowdfunding comes from being an early investor in a new project. A lot of successful kickstarter projects end up retailing at major stores, but kickstarters are always first in receiving the product for a lower than retail price. Also, the idea of having a limited number of units available can bring exclusivity to the project and further attract customers.
Furthermore, one of the key results that companies could attain form crowdfunding projects is an improvement in their image. By promoting engagement and allowing customers to feel like investors in the company, companies can create an image of being innovative and caring for clients. The possibilities are limitless, what is fundamental is to integrate the social media efforts with any crowdfunding projects, in order to achieve the critical mass necessary for the project to be funded, for the company’s image to be improved and, of course, to make some profit on the new products.