What defines crowdfunding now – and in the future?
Danae Ringelmann commenced a quest to redefine and redesign funding with an entrepreneurial journey that began in 2001. She has been a driving force behind the team that co-founded and launched the first of the two crowdfunding behemoths. Indiegogo, launched January 18th, 2008, eighteen months ahead of Kickstarter, has perhaps more right to an opinion than most.
At a time when it seems the word ‘crowdfunding’ is being applied as a term of self-approbation to almost any and every alternative finance product being launched, in the hope of a ‘halo’ effect, that definition may have been stretched so far it’s in danger of becoming meaningless.
So what of crowdfunding then, now, and in the future?
As the latest figures clearly show, rewards crowdfunding has firmly established itself, beyond doubt, as the new seed-funding for the 21st century.
Crowdfunding is creating an unprecedented global wave of innovation and is clearly capable of going places and achieving things beyond the reach of traditional debt or equity finance.
“When we invented the industry eight years ago we didn’t have a word for it” she said, addding “As you know, there wasn’t the word ‘crowdfunding’ to describe what we did: letting people vote with their dollar and become part of the journey, which we pioneered. That’s, the core of crowdfunding”, when I interviewed her recently.
Back then she was seeking “a much more efficient way to bring ideas to life” seeing the established processes as wasteful and ‘super inefficient’ – so why not go right to those people, who are going to be your customers anyway and let them decide – removing the guesswork?
So that “as a result, it’s also a much less risky way to bring ideas to life, because rather than getting money from one person, who’s gambling on whether your idea is good, you’re getting your money from the market itself. As I always like to say the best indication of a market is the market itself.” [ Rather than focus groups etc.]
Who can argue with that?
The market is, of course, the final arbiter – so why not cut out the gatekeepers and the guesswork if you can? It’s working astonishingly well, to judge by the explosive growth we are seeing.
So we turned to gatekeepers:
“Well, it’s kind of easy to say gatekeepers suck, they’re the bad guys. They’re not the bad guys; it’s the gatekeeping system that’s broken. And it’s the system that makes gatekeepers have to say ‘No’ more than they can say ‘Yes’, because basically the way they do their job is to gamble, essentially.”
“And when you’re gambling, you’re constantly looking for ways to reduce your risk in all kinds of ways. And that’s where things like bias come into play. That’s where things like limited networks come into play, and that’s why there’re all these problems around lack of women getting finance to lack of people of color getting finance, and all that stuff, because they’re not in the network, per se.”
“Because of this, the entire funding approach will be using this new way. Which is why we’re starting to become a pipeline for venture capitalists.”
“VCs are now using us as a way to get a hold of interesting ideas. It’s making their job easier because they can just go right to see what are the businesses that are actually getting real traction and have a real audience that people are ready to vote for with their dollar.”
“Because we’re making the process of making ideas come to life much more efficient and less risky we’re now penetrating the walls of the existing institutions of the world and changing their way, which I think is ultimately wonderful. Because there are plenty of entrepreneurs inside these walls and companies that have been wanting to go after a dream but they didn’t have a way to prove that there was a market. Now, their boss can be like, okay, prove it. Go do an Indiegogo campaign. Takes a couple of weeks. It takes some planning, but we’ll know very quickly if you’re onto something. And we can stop debating about whether something is a good idea; we can just know!”
“GE has done a few campaigns, and I think they’re just floored by how it completely revolutionized their product development process. It brought it down [the amount of time] from, let’s say, four years to four months. They’ve reduced the cost by 20 fold. For one product that they tested, it was sitting on their shelf for 20 years because no one had the guts to try it, to put it through.”
Back at the outset Danae and her co-founders looked first at equity as a route to revolutionize finance; she told me that back in 2006 at Berkeley the team got together and:
“The original vision was investing on the internet, which would be in the public realm, so it would be a public offering – but the security laws didn’t allow it.” Thinking again… “What I said was that there’s the SEC laws, but there are exemptions out there. And maybe what we could do is figure out a way to use software technology to navigate those exemptions more easily, because right now it’s very offline. And so that put us on a path of trying to figure out the exemptions more cohesively and figuring out if there’s something we could build technology-wise. And we talked to a bunch of lawyers and we were using up all of our pro bono time [at UC Berkeley] with these lawyers”.
Getting no traction they decided it was time to iterate:
“I said, we’re trying to change the law, start a company as first-time entrepreneurs, and completely reinvent an industry all at the same time. It felt like a lot to do. So I said, let’s just put the changing the law thing aside, put the equities piece on hold, and let’s just see if we can use the internet to raise money. And that’s when we came up with the perks concept, as, like, a replacement for profit. And that’s when the guys committed, and we were all in.”
“What we’ve actually unlocked is that we proved that profits are not the only motivation to fund. If it were the only motivation there would be no dollars going into Indiegogo at all, clearly, as we don’t offer profits. But what we unlocked is what we call the four Ps: people, passion, participation and perks. The four reasons people fund. They fund to support individuals, they fund to be part of the passion about the project or idea – that’s just really cool to them – or they fund to participate. They want to be part of the making of it or the journey, or they want to say, hey, I was in early, I helped make this happen.”
Will Equity Crowdfunding Unlock a New, More Powerful Funder-base?
“With equity crowdfunding coming, I don’t think those motivations are going to go away. A lot of people are saying, oh, the perks business is dead. No, human beings will just stay human beings. The same people that want to participate in things … I think it’ll just unlock a new funder base.”
This may even be a more powerful funder base because people will be able to not just get ownership from something, but they’ll also get perk-type rewards as well.
“Responsible investing or socially motivated investing is the most powerful way to invest. Perhaps the main type of way to invest in the future. Profit-only investing will become a subservient one.”
We talked too about the ongoing innovations underway at Indiegogo – many of them still under-wraps. Apart from recent launch of ‘Enterprise Crowdfunding’ for corporates and the InDemand service Danae made it clear that Indiegogo continues to evolve quietly:
“we do lots of things one-off to see what works. But the moment we start to really get traction in these things, we’re going to look to productize it and make it accessible to absolutely everybody”.
The passion for entrepreneurs and entrepreneurship is clear. So while, as recently reported, the raw stats may seem to favor Indiegogo’s main rival, Kickstarter, who has ruled out a move into the equity space and benefit from a streamlined model and a very clear focus, under the hood Danae and the Indiegogo team seem to prize and prioritize innovation above all.
And it sounds like the time to tackle equity (and, if necessary the legal and regulatory innovations to make it happen) may not be far away for this team. These first-time entrepreneurs who have already established a whole new form of funding, a new economic model, having played a significant role in changing our world for the better – for both entrepreneurs and the crowd – us all.
Barry James is a serial tech entrepreneur and technologist, founder, writer and conference creator Barry created TheCrowdfundingCentre, now a global resource for #Crowdfunding, and VentureFundingHubs an innovation to support entrepreneurs globally. He has a long history in #Fintech stretching back to the late 1970s. Founder of the UK’s first national conference, Crowdfunding:Deep Impact, he has been at the forefront of the development of Fintech and crowdfunding in the UK, and internationally, since its earliest days helping found the UK’s All-Party-Parliamentary-Group on the subject and influencing the nature and direction of regulation. As a pioneering systems and eco-system architect, he and his team remain active in creating new models and new technology, including the creation of more than 70 funding hubs worldwide.