The Power of a Sticker

When I first learned about crowdfunding, I thought it was a cool new way for small-scale entrepreneurs to get the public interested in their product. After reading more about crowdfunding this week, I am amazed at the number of available platforms, and the amount of power these platforms give companies and organizations. In 2013, the global Venture Capital investment activity reached $48.5 billion (1). In that same time period, Masssolution approximates crowdfunding totals to be over $5 billion (2). That means the average population was able to generate just over 10% of what VC investors did….and that is crazy to me! The idea that an average person like you and me can give a few dollars and make the same impact as a VC firm will give new ventures and companies a great deal of power in the market.

People inherently want to be rewarded when they invest their money, whether it’s $5 million from a VC firm, or $5 from an average person. Imagine you are an organization in need of funding to provide a clean water well to an African village. You may be able to find some money from a philanthropist, but there is very little incentive for a VC firm to invest. The organization would be much more successful if it crowdsourced the funding using a site like Kickstarter. Let’s say you offer a sticker to someone who donates $5, and the sticker costs $1 to make and ship…that means for every $1 you spend, you make $4. If 1 million people donate $5, you’ve made $4 million, and all you had to do was pay for stickers. Those 1 million people may be willing to accept a sticker as payment for their investment, but you can’t pay a VC firm with 1 million stickers for their $5 million investment. And therein lies the power of crowdfunding sites like Kickstarter– you can pay your investors with non-monetary benefits. Funding is not the only benefit of crowdfunding, though.

Venture Capitalists are a small group of people, so when you first start up a business, you have to spend a lot of time and money marketing your product and building interest, in order to generate income. What crowdfunding has over traditional VC investment is immediate “buy-in” from the potential customers. This is very much the same idea we discussed last week with turning social aid into a business. When the people you help are monetarily invested in the aid they receive, everyone benefits because the community is involved in the process. The money in crowdfunding comes from people who are invested in your ideas and the services you plan to provide. The crowdfunding platform gives you the opportunity to market your business and adjust your product based on feedback from these numerous “investors,” even before you have an actual business. For this reason, I see crowdfunding becoming an even bigger part of the economic system, especially for social ventures who are dependent on the community involvement and buy-in. 

What do you think? Will crowdfunding be the next generation of social venture funding?

1)  http://www.ey.com/Publication/vwLUAssets/EY-venture-capital-insights-2013-year-end/$FILE/EY-venture-capital-insights-2013-year-end.pdf

2) http://www.fastcoexist.com/1681808/the-51-billion-future-of-crowdfunding-is-more-than-kickstarter

crowdfunding

Reading about the funding gap that exists for social enterprises because of their existence somewhere in between for profit and not-for-profit models got be thinking about different crowdfunding models and how those could be better used to support social ventures. Websites like kickstarter.com and indiegogo.com provide groups, individuals, and businesses a way to raise funds from people all over the world through the power of the Internet. Kickstarter's model focuses mainly on creative projects, but it has been very successful in helping all sorts of people get funding they could never have raised on their own. Generally speaking, the projects proposed don't need to raise all that much money (certainly not as much money as would be required by significant social enterprises), but it provides an interesting model that could be potentially be expanded. Socially minded projects seem like they would be perfect so funding campaigns designed around social media and awareness. The kind of crowdfunding model described above could easily benefit initiatives focusing on issues of poverty, education, and other basic human needs to the same way Kickstarter helps creative projects. The questions is, how can we expand that model to provide the kind of financial support some of these projects need? I'm not sure how to make this kind of crowdfunding sustainable or robust enough to provide the kind of support needed by social enterprises, but I think it's certainly worth thinking about.