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  1. #1
    Join Date
    Jan 2007

    Default Crowdfunding

    I've been looking into the crowdfunding area as a way to obtain capital from the people in the areas who would benefit from my work.

    For those who don't know: crowdfunding is the process of receiving money - generally small amounts - from large numbers of everyday people as opposed to angel investors or venture capitalists, or rich family members.

    There are 3 types of crowdfunding: equity, lending, and donation based.

    Donation based is by far the biggest and legal, lending is significantly smaller and legal, but equity based is not yet legal.

    In general what the crowdfunding platform does in all cases is collect the money and subtract a fee - anywhere from 3% to nearly 10%. Some platforms require funding goals be met or else no funding is actually obtained, most others allow even partial funding to be collected albeit at a higher cost. Most platforms have a general theme but are otherwise open to receiving projects while Kickstarter - the name plate owner in this field - requires approval of projects. All platforms also have some form of deadline - projects can be 7 days to 90 days long, but not forever.

    In particular, equity crowdfunding area has morphed into a big gold rush - the passage of the JOBS act last year was thought to be the starting gun in a horse race to riches, because this legislation was ostensibly to remove the barriers presently in place preventing banksters from directly preying on non-certified investor class suckers - i.e. all those who don't have $1.5 million in liquid investable assets.

    A year later, we're still 6 to 9 months away from equity crowdfunding happening. I don't know if equity crowdfunding will occur or will occur in a significantly watered down fashion because to a significant degree (to me anyway) equity crowdfunding is a threat to existing IPO business in the existing VC/investment bank paradigm.

    In any case, I've looked extensively into the world of crowdfunding and here are my thoughts on it. YMMV

    There has been a study performed on Kickstarter crowdfunding, you can see an infographic and links to the study data here:

    Questions going in:

    1) How important is the crowdfunding platform?
    2) How much of crowdfunding is a function of internet scale vs. some other factor like ease of use/user interface, operational efficiency from the fundraiser's perspective, network effect, etc etc
    3) What might be realistic expectations for my particular project?

    1) How important is the crowdfunding platform?

    Short answer: not at all for the individual project owner

    While the study noted above was primarily for Kickstarter and showed some glowing numbers associated with being featured by Kickstarter, the reality is that there are so many projects that it is simply unrealistic to expect large numbers of people to browse through all of them to find any one in particular (i.e. yours).

    Thus the success of any particular project is primarily a function of the project's attractiveness as a whole - i.e. how cool/sexy/needed is the project, followed by the strength of your personal social networking. I say networking because it isn't just your own personal social network, but the social networks you can bind to the project - for example autism support groups for a project about making an autism documentary.

    If you don't have some sort of social resonance or a product which people want, then the lowest devolution is the crowdfunding platform serving as a vehicle to hit up all your friends and family (and their friends) for money.

    As you can see, the platform in general plays very little for each specific project. There is an exception: being featured. See the next item

    2) How much of crowdfunding is a function of internet scale vs. some other factor like ease of use/user interface, operational efficiency from the fundraiser's perspective, network effect, etc etc

    There is a network effect in crowdfunding. However, it is the crowdfunding platform itself that enjoys it. The more ubiquitous a platform is, the more likely the cool/sexy projects will go to it. The more cool/sexy projects, the more aware future projects will be of the platform. Of course we all think our project is cool/sexy...

    As for featuring - I have it from industry insiders that there is no success creation going on there. The projects that are featured are ones which are already garnering attention and funding success on their own - and the featuring is to magnify that to both the platform (because sexy/cool projects are self identified and these benefit the platform as previously noted) and the project itself.

    Obviously there are a lot of different types of projects that can be crowdfunded - and the dynamics can be quite different, particularly for new product development. It is this area which sees the most over-funding because the 'donations' in these cases are actually product purchases hence are scalable. That's how you get a $200K project morphing into $10M in donations.

    Or in other words, the problem you have with any crowdfunding on any platform is the same as any nonprofit/for profit/business/person/ etc etc - how to be noticed by enough potentially interested people that your actual merits can be sold.

    3) What might be realistic expectations for my particular project?

    What I'm seeking to do is different than most crowdfunding projects. Most of them are essentially solipsistic - the project is all that exists for the project owner until said funding is completed and work delivered.

    However, what I am hoping to do is to offset to some degree the expense associated with mapping out a new city - so that I can roll out my free (ad supported) product. Or in other words, if the model can work, then it would mean multiple and likely parallel projects as my goal is to map out the top 30 metropolitan areas in the US, then go on to key cities worldwide.

    This is problematic because while anyone might contribute to one project because they think it is cool, logically those in the area to be covered would be more likely to. Equally even someone who is completely altruistic - is probably not going to want to contribute to all 30 cities I'd want to do this for.

    So on the one hand, if the primary factor behind crowdfunding success is the coolness of project followed by personal social network - which is not optimal since my/my company's personal social network is nonexistent in these target cities - which is discouraging; on the other hand, I had already planned to treat each campaign like a nonprofit operation: i.e. 25% expense ratio or spending $1 for each $4 I hope to raise.

    Equally while the amount I'm seeking to raise isn't gigantic: $40K for the target city, at the same time the average crowdfunding project is closer to $5000. There are a few huge ones, but there is a marked decrease in success rate as you go above $10K in desired fundraising. This data is from the study above; said study can show correlation but cannot be relied on to understand causation.

    In any case, I'll be kicking off this crowdfunding in the next few months and will update.
    Last edited by c1ue; 03-08-13 at 01:01 PM.

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