Crowdfunding

Gary Dushnitsky: Dan, can you give us a sense of the crowdfunding phenomenon and the promise it holds for entrepreneurship?

Dan Marom: Crowdfunding (CF) has witnessed incredible momentum over the last two-and-a-half years. Research firm Massolution estimates that crowdfunding platforms raised $2.7bn and funded more than one million campaigns, despite the precarious state of the global economy. In the United States the signing of the JOBS (Jumpstart Our Business Startups) Act legalised equity crowdfunding, signalling the disruption of traditional funding mechanisms in favour of democratised access to capital. Entrepreneurs, startups, nonprofts and corporations have embraced crowdfunding over the past years, opening the door to a larger disruption in early-stage finance as crowdfunding becomes increasingly competitive with traditional funding mechanisms such as venture capital and angel investments.

While crowdfunding is a powerful mechanism for entrepreneurs to raise capital, it also espouses many non-monetary benefits. When an entrepreneur taps into larger social networks to pitch an idea, the entrepreneur is beginning to create mindshare and marketshare within a virtual community. This community then becomes a critical resource for the entrepreneur, not only for the funds they are investing in the project or business, but for the ideas they are sharing. For an entrepreneur, being in direct contact with potential customers is of tremendous value, for it facilitates market value and size assessment, and direct product feedback.

GD: How did you come to develop your insights on the topic?

DM: In 2010, I co-authored the first book, to the best of my knowledge, on crowdfunding, The Crowdfunding Revolution, alongside Kevin Lawton. The main thrust of our work is to highlight the way in which crowdfunding promises to fill a gap in the market for intermediated capital formation. It is, in the most simplistic terms, social networking meets venture financing. This new phenomenon, we argue, constitutes one of the most powerful developments in our modern-day socioeconomics, and promises both to transform the capital formation landscape and to offer an avenue for a creative and intellectual rebirth.

In the last couple of years I’ve been fortunate to speak passionately about crowdfunding around the globe, consult entrepreneurs and corporates, and to hold several advisory board memberships and EU advisory projects. To these roles, I bring insights developed through rigorous analysis of data as part of my research work in the Hebrew University of Jerusalem.

GD: What are some examples of leading crowdfunding platforms and projects?

DM: Crowdfunding falls into four sub-categories, divided by the nature of the return to the crowd-investor: equity-based crowdfunding, peer-to-peer lending, and donation and rewards based crowdfunding [see above].

GD: Given the proliferation of platforms, would you recommend entrepreneurs to fund raise through several platforms in parallel?

DM: That’s a great question. There are several reasons why launching a campaign on multiple platforms could be advantageous. Namely, it would be wise to spread the word and gain mindshare through multiple platforms in order to attract market share and multiple investors. But, based on four years of observations, I believe that there are four important factors that could impede the benefits of a multi-platform campaign. For example, the entrepreneur may dilute the impact of his or her social network by spreading their attention and commitment across multiple platforms. Accordingly, each entrepreneur should carefully weigh the costs and benefits before attempting to engage in crowdfunding in more than one platform at a time.

GD: That is a fascinating observation. Are you suggesting that crowdfunding campaigns should realistically be viewed as Collecting from Friends, Family and Followers (CFFF)?

DM: Yes, I believe that while CF has the potential to democratise access to capital, successful campaigns also exhibit strong socially embedded dynamics. For example, data from the leading reward-based platform, Kickstarter, suggests that around 85 per cent of the individuals who back projects are not serial investors, but backers who only invested in one campaign. Indeed, extant work reveals that successful campaigns are the ones that created a critical mass of funding from close social circles – friends, family and followers – and then were able to leverage that initial interest to spread the word and break into further social networks, reaching to the crowd.

What does that mean? Let’s say an entrepreneur is starting a reward-based crowdfunding campaign. As the data suggests, the odds are that an entrepreneur is unlikely to face or raise funding from serial investors, which have no prior acquaintance with the entrepreneur. Rather, she will mainly secure funding from her own social network, usually at the early days/ weeks of the fundraising campaign. My takeaway from this observation is that the entrepreneur herself attracts most of the investment by mobilising her own social network. That is, the pool of backers is not predominantly provided by the platform. Therefore, she will get the best results by focusing on family, friends and followers. The main thrust of her time and energy should be on cultivating the existing relationships, and driving traffic into one specific campaign, launched on a single platform.

GD: You have mentioned three other factors that may affect a multi-platform campaign. Can you elaborate on them?

DM: In addition to the socially-embedded nature of the backer pool – which you label as CFFF – I believe one should also be aware of the time and resource commitments necessary to run a successful campaign. Running an effective marketing campaign for a crowdfunded project is hard work and requires the entrepreneur to communicate with the media, bloggers and potential contributors. As such, that campaign needs to have “one voice” and should maintain consistency in the branding and external messaging. By running a campaign on multiple platforms, it can be confusing for the potential backer (and also the media).

Another factor has to do with speed and nature of the capital aggregation. Most campaigns are very transparent about the fundraising process. If your goal is $100,000, the backers will want full transparency with how much money has been raised, who the investors are, how the money will be utilised, etc. If an entrepreneur is utilising multiple platforms simultaneously, they may be spreading their resources too thin and lose momentum in the process. In other words, they would not be able to demonstrate strong continuous accumulation of funds towards a focal campaign on a given platform. Moreover, an entrepreneur risks falling foul with his or her social community; if it becomes apparent that an entrepreneur is running multiple $100,000 campaigns, then the goal is no longer $100,000 and the trust and transparency are compromised.

Finally, norms play an important role in the crowdfunding community. While many platforms do not have formal rules against running simultaneous campaigns on multiple platforms, it is generally frowned upon. Most platforms recommend running one project at a time. A number of platforms explicitly state that an individual should focus exclusively on launching a campaign on their platform.

GD: If multiple platforms don’t necessarily raise your probability to succeed, what do you recommend entrepreneurs do?

DM: To run a successful campaign, the first thing an entrepreneur should know are the ins and outs of the potential backers. Who are your potential backers? What is it about the project they find compelling? A successful campaign taps into the factors that motivate potential backers to take action, so entrepreneurs should understand if those motivations are intrinsic, social, rewards-based, financial, etc.

Thinking strategically and tailoring a campaign to align with that strategy is also important. If you understand the motivations of your potential backer, the most effective call to action is by creating a short, targeted and clever video campaign. Rather than emphasising technical or functional components of the idea, the video should be dynamic – tell your story. Be compelling. Emphasise the perks and motivations of your potential prospect. Ultimately, entrepreneurs need to excite the prospect, because they are investing in the team as much as the idea or product.

Perhaps the most important part is the marketing campaign. Our world is saturated with content these days, and to make an impact, a campaign needs to build momentum and be fuelled by a powerful marketing strategy. Entrepreneurs should engage bloggers, the media, persons of influence and PR outlets to build interest and create buzz around the campaign. Since crowdfunding campaigns have a limited amount of time in which the target funding goal can be reached, it is critical to start utilising these marketing channels as early as possible. If the campaign is covered by Forbes, that’s great, but it needs to be in the early stages to make the most impact. Not all campaigns go viral, so utilise as many marketing channels as early in the campaign as possible.

It is important to note that marketing should be an intensive daily effort – to keep backers engaged. The more you engage with existing backers, the likelier you are to build momentum and increase mindshare. The great thing about crowdfunding is we see the creation of virtual communities, where members can mindshare, exchange knowledge, and pool ideas on a topic or initiative of mutual interest. In those virtual communities crowdfunding is the new “like” and backers are helping to unleash the potential of new ventures.

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Resources

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