Crowdfunding has become a popular new source of start-up capital leading to new innovation, but is dependent on social networking. Crowdfunding is simply collecting investment dollars from a larger number of people; from the crowd. For example, a company named Pebble which builds a watch that displays messages from an iPhone was able to raise $10.3 million dollars from 68,929 people. Attracting small amounts of capital from more people creates a new funding source, but requires initial momentum from a personal social network.
Social Proof Proves Crucial
Social proof has evolved as a significant source of credability since the popularity of social networks and is now instrumental in validating a project. Social proof is the concept that people in the community validate a product, service, business or idea through recommendations such as comments, votes, or other form of feedback. A restaurant on Yelp with a 5 star rating is an excellent example of this as a business building credability from the unbiased community.
Government regulation hasn’t caught up (SEC is in the process of handling this) so there is potentially more risk involved for the investor. Most of these investors aren’t professional investors and could be swindled or simply ignorant about any dangers. Social proof is able to reduce that risk. The Economist reports in their June 16th issue that projects on Kickstarter (a popular crowdfunding website) that are able to raise 20-40% of their funding target themselves through friends and family are much more likely to attract strangers to invest.
As a result, entrepreneurs with established social presences are much more likely to actually get their projects completely funded and off the ground.
Beyond fundraising, entrepreneurs are able to sculpt and refine their projects with an active, relevant social network. This refinement is often able to take a project to the next level before it ever reaches the potential investors. Closing the wholes and polishing the plan before presenting the project dramatically improves the credability and investor confidence.
The current financial crisis has left banks strapped for capital and really limited new growth. Businesses looking to start or expand are unable to do so as readily as they used to. These new crowdfunding mechanisms can help provide an alternative source of capital that can get projects off the ground sooner and in a down economy.
Some investors prefer this to the stock market because it is more personal and more connected to the founders. There are also other non-monetary benefits such as being listed as an investor in the credits of an indie movie.
From Capital to Innovation
The breakthrough book, Innovator’s Dilema explains that the primary source of true innovation doesn’t often come from the biggest companies in the business, but from the small guy. In fact, the author argues that the best approach the big market leader should take is to form a start-up within the corporation that runs as a seperate entity.
It turns out that smaller, nimble organizations more readily try new approaches, look for new opportunities, and think differently. This really helps show the value of seeing what start-ups produce.
From Start-up to Corporate
It is easy to see the benefits of crowdfunding for small companies or projects, but there is usually very little discussion about how big business will be affected. In short, corporations will be able to watch a start-up gain traction, meet its’ targets, prove its’ value and then buy their ideas and maybe their talent too.
At first, the start-up can’t even get on the corporate radar, but with the fuel from crowdfunding, they’re able to change that. Google seems to acquire a company every month. Many are purchased because they want to take a good idea with a $1 million budget and catapult it around the world with a $50 million budget.
Splashes and Ripples
It is clear that these new funding opportunities will make deep splashes in some markets and at the very least ripples in others. Regardless, crowdfunding is a new tool to put in your tool belt.
Listen to me speak on 7 Social Media Trends on November 27th in San Diego.