The closest thing today to venture fundrasing from the masses is a Kickstarter project. A sneak peek inside the newsletter, originally posted on March 3.
Way to Go, Richmond, Virginia, 2008. Part of “Workspaces” series.
A couple days ago, I mentioned this on Twitter:
I’ve paid attention to micro-vc, crowdfunding, micropatronage, peer-to-peer lending, and various derivations of micro-funding models for quite a while. It’s a fascinating area, and it led towards me giving a talk about venture capital at SXSW in 2009. While there are tons of platforms to help people raise money for nonprofits, charitable causes, and passion projects, there haven’t been many avenues for *companies* looking to raise capital from the masses.
But for the right startup, with the right pitch, Kickstarter has become a great avenue for companies to raise funds. NeighborGoods is one of the most interesting new pitches I’ve seen: a Kickstarter project to fund a new product feature, $10,000 to be used for (I’m guessing) developers, embedded in an intelligently crafted pitch to community building and collaborative consumption that gives donors something for their support. Brilliant, IMHO.
Thinking about Diaspora, NeighborGoods, the iPod Nano watch, Kickstarter, Pepsi Refresh, and Wikipedia, there’s a couple interesting points here:
1) Donors, not investors.
Donors to Kickstarter projects aren’t investors. They get no stake in the company and no claims to the revenue created by the project. Accredited investor laws are a big reason why these can’t be structured as investment stakes, but I expect some companies to get more creative about how they are able to pay back their donors with products and services instead of ownership stakes.
2) Crowdfunding is similar to project financing, but it isn’t venture capital.
Crowdfunding can be thought of a kind of project financing (and the best kind, since the funds don’t have to paid back), but it’s not venture capital. Crowdfunding is "dumb money", and lacks the tactical advice, support, and relationships of "smart money". Sometimes you only need dumb money, sometimes you need smart money; just know what you’re getting.
3) Crowdfunding is a highly evolved form of sales and community engagement.
Well-run Kickstarter projects can be great footholds to build a community, and establish base of supporters that can evolve into customers when the time is right.
4) Crowdfunding funds ideas, not execution.
As noted by Mike Masnick in Techdirt,
One of the things you quickly learn at a startup is that the initial idea is meaningless. Once you get to work on executing, that idea will change daily (if not more often). You may have a general idea, but reality gets in the way, and you adjust and adjust and adjust. Often, what comes out in the end is entirely different than what you set out to do, but that might not be a problem. It’s quite rare for a project to set out towards a specific point and end up at that point.
As Mike notes, it can be difficult for a startup funded through Kickstarter to change development paths once they’ve raised money from the community, simply because they could feel the pressure from the community to stay the course and deliver what they said they’d deliver. Investors in early-stage companies know that things change, are incentivized to shift strategies if it makes sense, but donors may not feel the same way.
5) Crowdfunding gives fans a chance to support their passions.
Companies may not always have the right product or service to sell a dedicated fan or user, but tying a crowdfunding program to a specific project creates a monetizable touchpoint that the company not have had before. For example: I may never want to buy a Tumblr theme, or pay to use Twitter, but would I spend $10 to support an effort to add more servers and increase service reliability? Possibly.
Points to consider. I’ll bet we’ll see many more startups use crowdfunding approaches to raise money, and we’re going to see some great success stories. Send them to me when you see them?
