What has been the driving force behind the rise of social media has been the power of the crowd to express satisfaction or dissatisfaction about something by using technology to broadcast messages instantly to anyone willing to listen.
On-line marketplaces such as Kiiji (open market trading), OpenTable (restaurant reservations), Match.com (dating), Ebay and Amazon (products) have eliminated inefficiencies in connecting buyers and sellers by making transactions more accessible through the use of technology.
Not surprising then, the power of the crowd and on-line technology have been the drivers in launching a new way of raising money - Crowdfunding. As defined by Forbes, Crowdfunding is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet”. And this is the topic of the next series of blog articles that I will write for you.
With Crowdfunding Platforms (CFP) supporting the raise of an estimated $2.78 billion in project funding in 2012 and forecasted to generate $5.18 billion worldwide in 2013, the sector is particularly strong, boasting double or triple digit growth rates.
With such favorable fundamentals, Crowdfunding just shouldn’t be ignored.
For those of you not familiar with this rather unique way of micro-financing; let me start with a quick definition and then describe the types of Crowdfunding models in operation today. There seems to be a lot of confusion about the differences and it’s important to have a good starting point to get at the right facts as a foundation.
Crowdfunding refers to an exchange between a person and/or a company (initiator) that has an idea, project, social/political cause or product prototype and for which they are looking for funding support from third parties (backers/crowd). Crowdfunding is the means by which small contributions are collected from many parties in the crowd so the initiator can reach a specific funding goal. Sometimes the contribution amounts are very small $5 and some can scale to $1000’s of dollars depending on the project.
All parties in this marketplace use on-line Crowdfunding technology platforms to broker these transactions. These platforms have been developed by companies that handle the exchange. Examples are Kickstarter, Indiegogo, RocketHub, CrowdCube, Kiva, FundRazr, CircleUp and hundreds of other sites that have been developed since the Crowdfunding concept got its start in 2005.
Now, here is where the confusion arises with regard to Crowdfunding and its opportunity.
There are essentially four types of Crowdfunding models in the market today. They are very distinct in terms of profiles, risk orientation and regulatory limitations. So if someone talks about Crowdfunding you must seek clarification on what type of model they are referring to because there are important distinctions to consider of each.
Here are the four types.
Donation based Crowdfunding is philanthropic or sponsorship oriented which is very much commonly recognized. If there is a cause, event or charity a donation is provided by a backer and there is no expectation of compensation or financial return other than the satisfaction of contributing. Well, OK, there might be a tax receipt issued and a financial benefit (Smile).
Reward based Crowdfunding involves the exchange of non-monetary rewards such as gift or the opportunity to pre-purchase the initiators product or service. The backer does not expect a financial benefit in return for his or her financial contribution. These backers are fans or evangelists of the initiators project. This type of Crowdfunding has been the most popular and widely used by entrepreneurs from artists, musicians, film producers to designers of products.
Lender based Crowdfunding is based on advancing a loan to an initiator with the expectation that it is paid back in regular installments which include the original principal investment. Examples of some sites are LendingClub.com and Prosper.com. This is the least popular of the models.
All three of the Crowdfunding types mentioned above are legally employed. The following model is not.
Equity based Crowdfunding is the model where funders receive an interest in the company in the form of equity or shares and may also share in revenue or profit-sharing arrangements. This type of Crowdfunding is being touted as a new phenomenon that will put the current traditional equity funding mechanism such as Angel investment on its head. But, the problem right now is that the various Securities Commissions have yet to approve its use and therefore this type of Crowdfunding is illegal in various jurisdictions.
For example, equity-based Crowdfunding is widely legalized in several countries in Europe, as well as Australia, but not yet in Canada. And although the United States, through the Jobs Act, is working toward a legalized standard for equity Crowdfunding the regulators are slow in implementing a functional law and by that I mean rules employed to implement it into law. The SEC, which is already late with its submission, will probably continue to delay for the unforeseen future. Equity Crowdfunding on ice!
You can now appreciate why Crowdfunding is often referred to as the democratization of funding. It allows a greater opportunity for anyone to fund a project and participate in turning dreams into reality.
You now know the different types of Crowdfunding models. Why is this important? Because knowing the varying types will allow you to assess if one of these models is the right fund raising channel for you.
Crowdfunding has several advantages and disadvantages. I’ll cover these in my next post entitled – “Crowdfunding – Is it right for you?”
Leonardo da Vinci had lots of ideas, some of which were never realized until many centuries after his death. His era just didn’t have the capability of absorbing his inventions nor did he know how to exploit them. Da Vinci and the people of his time just lacked the knowledge to make them relevant.
A pity really because no one had an inkling how innovative his inventions were and how many years later they would confer such benefits to future generations.
Molto grazie, Leonardo!
There are lots of great ideas floating around. Some bad ideas and some really, really great ideas that for many reasons will never get into the hands or minds of customers.
Ideas are basically – a dime a dozen.
It’s not to say that every idea in the 12 pack is worthless, in fact some of them might be worth millions or billions of dollars. The cold reality is – if ideas cannot be implemented and show value then they are worthless. Good ideas need to be placed in the hands of users to make a difference; otherwise they will remain tragically unknown.
Over the years I have helped my clients answer this basic question – “How can I determine if there is a market for my technology?”
There are two broad types of entrepreneurs that come to me asking this question.
Entrepreneur Type 1 – Entrepreneurs with an existing technology and are looking for a market
This is the most common situation.
Case in point: A group of technologists come up with an idea and expend both time and money to develop a technology. After months of development and with technology solidly in hand, they open their lab door, peer out and wonder who might be eligible buyers for their invention.
Here’s an example, a team of entrepreneurs in the wireless sector have an idea to create a cool mobile application which they believe would solve a problem for market segment X. They develop the application build out resources and begin to talk to potential customers. Very quickly and disappointingly they realize no one wants to buy their technology.
These entrepreneurs represent a technology looking for a market. Somewhat problematic – since doing the homework after the fact gets complicated. Why? Because technologies developed in a vacuum rarely succeed.
Entrepreneur Type 2 – Entrepreneurs looking for a customer need or problem in a defined market sector
This is the least common situation.
Entrepreneurs decide to research a specific market to find an unresolved problem, find one and design a technology solution that will satisfy the market’s problem. These entrepreneurs spend time and money in assessing a market opportunity first, then identify and build a technology solution to solve the market segment’s problem(s).
These entrepreneurs may have market domain knowledge and technology expertise; but, they approach the market assessment process first without a predetermined technical bias. This puts the market place first and the technology second.
So back to the question: “How can I determine if there is a market for my technology?”
Let’s look first at this scenario: A small team of entrepreneurs decide to start another technology company after successfully selling their company to a larger competitor. They decide the thrill of building and selling a company is worth another shot. They set off looking for a market problem that would be the focus for their next company. Finding one, they design a product solution to resolve the problem. As the prototypes are being built they also test them in concert with lead customers in the market – to get the product right.
Answer 1: A Market Assessment Analysis
In the above example, the former activity is called a market assessment analysis which involves a high level scan of the marketplace and gradually narrowing it down to a targeted market segment candidate. Direct feedback from this candidate segment provides the team with further insights into the problems that need to be resolved and the possible solutions which should be designed for the target customer segment.
Answer 2: Market Validation
The latter analysis is called a market validation study. At this point the solution is being tested with customer feedback to refine the product and validate its ability to solve the problem the customer needs resolved. Often an iterative process yet very valuable in getting the product right.
Why the answers are important
For a technology to become a product it must solve a customer’s array of pain points and input/information from customers is required to make this happen. Why? Because a technology is not a product until it is a solution for a customer.
Regardless of what profile type you think you might fall into, conducting a market assessment and a market validation analysis is an important step in the commercialization process. It saves time and valuable development and marketing resources by testing a product concept, idea, position, and customer buying drivers before a product is launched or engineered.
My proven approach in conducting market assessment and market validation analysis can help any entrepreneur step through the process to get to the right markets and transform their technology into products.
I am currently writing an e-book to reveal my secrets for entrepreneurs. Let me know if you would like a copy once it is ready. Or just give me a call and I would be pleased to share my thoughts with you.
One of the most amazing stories I read in 2012 was about Felix Baumgartner’s supersonic freefall from a specially made helium balloon. His successful jump from 128,100 feet / 39.040 meters on October 14 broke several records not the least of which was becoming the first person in freefall to break the speed of sound – exactly 65 years after Chuck Yeager first broke the sound barrier flying in an experimental rocket-powered airplane.
Check this short video clip and see what I mean -
Felix had a vision all his life of sky diving and piloting helicopters. When he was 16 years old he began sky jumping and built a solid career and skill set in this activity.
So, why I am so impressed by his story? Felix exemplifies the power behind execution and the essential habits necessary in achieving a vision. Here’s what we can learn as entrepreneurs.
Baumgartner didn’t begin his preparation for his Oct 14th jump months or even years before it happened; his preparation began with his dreams as a young boy at a nearby airport watching sky divers’ parachute from planes. He signed up to start learning to jump as soon as he was legally able to do so, and eventually enrolled in the military to further refine his skills. Over the years he has achieved so many unique sky diving feats all of which prepared him for his leap from the edge of space on October 14th.
Preparation is a series of incremental steps which build toward a desired outcome. In general most business people don’t do a great job in preparation. Why? It seems we all can get caught up in our belief systems or gut assumptions without working through the rationale and details behind our decisions and action steps. What eventually snags any hope of progress is not taking the time to prepare the right information and/or skills sets that will advance our desired outcomes.
2. Knowing how to build an expert team to support you
Felix also assembled an expert team of engineers, flight specialists and even relied greatly on his project mentor Col. Joe Kittinger who holds the world record for the longest freefall.
No one can achieve a vision or goal without the support of others. Even an entrepreneur with an abundance of knowledge and experience will need to rely on people smarter and possess specific insights that make the project team that much stronger during implementation.
3. Focus and discipline on a few, meaningful priorities
As I mentioned earlier, Baumgartner had a dream – a singular focus on sky diving and he had the discipline to follow through. How often have we seen the “spray and pray” approach in getting things done? Lists upon lists of things to do; yet priorities never get done. Things get started but they never get finished. Chet Holmes in his book, “The Ultimate Sales Machine” wrote – “Success isn’t about doing 4,000 things; it’s about doing a few things 4,000 times.” What this means is focus on a few priorities and dig deep in making them happen. Have the discipline to stay on course.
4. Courage to take the plunge
I get goose pumps every time I see Felix take his step away from his capsule into space and freefall rapidly to earth. What a feeling it must have been to take the plunge after so many decades of work toward achieving this final goal.
So, how often do we make excuses, delay or fret over the fear that we might fail in achieving our goals.
So what’s holding you back from achieving your goals in 2013?
What are the top things you should – do better, eliminate because they are holding you back or amplify because you are good at doing it? Once you set your priorities above all else – implement. This is the number one driver in achieving your goals. Implement with preparation, by leveraging a team, with focus and discipline and with the courage to take the plunge.
Best wishes for your success in 2013!
Crowdfunding for entrepreneurs and investors is a hot topic — and it’s only going to get more attention in the near term, as the American JOBS Act makes Equity Crowdfunding a reality for those looking to raise business capital with this innovative model. Creekstone Consulting Inc. wanted to dig deeper into this phenomenon and has developed an industry white paper to help explain how business owners and investors alike plan to use Equity Crowdfunding to revolutionize business models.
- Read our white paper on Equity Crowdfunding. Measuring the New ROI: Return on Involvement
Some of our key discoveries from talking with business experts and representatives from crowdfunding platforms gave us insight into how creative people are thinking about using this model to their advantage — and why it’s so important for countries like Canada to join the USA and Europe and get on the Equity Crowdfunding bandwagon:
- Equity Crowdfunding lets companies relatively easily create strong engagement with their consumer base which can become self- sustaining. Investors can be consumers as well as “evangelists” helping the company promote itself.
- Investors may seek out this kind of engagement willingly, seeing value in being able to “be part of something they believe in”.
- The equity Crowdfunding model can be very effective both for start-ups in the “idea” stage as well as mature companies that already have revenue. All participants gave particular attention to questions surrounding the motivations of both companies and investors to get involved in equity Crowdfunding.
Here’s an excerpt from our white paper:
Lopez concurs that many of EarlyShares’ signed-up companies are intending to use equity crowdfunding for publicity. “I can think of one company in New York City with 150 employees and millions in revenue and multiple locations… they’re doing a $500,000 raise for marketing purposes. They’re giving up 5 percent equity to have 5,000 customers. They will be able to say they’re partly customer-owned, and you’ve automatically proved customer loyalty.”
That marketing bonus is sustainable: “If they own a piece of your company, they will naturally want to buy from you. You get money, customers with a vested interest and market validation for your product before you even launch it. You can’t get that from a survey or a focus group!”
As part of our research into business incubators and accelerators, we talked with Greenberg Traurig LLP Intellectual Property Attorney Chinh Pham, whose firm is one of many providing in-kind support services for participants in MassChallenge, a Boston-area accelerator, partnered with Startup America, that calls itself the largest accelerator competition in the world.
As one measure of the program’s value, MassChallenge notes that the 111 startups supported in the 2010 accelerator raised over $100M in outside funding and created about 500 new jobs in under 12 months.
We talked with Mr. Pham about the opportunity and challenge of developing an accelerator program in Boston. Read more
While researching our feature on the value of Incubators and Accelerators for startups, we got in touch with Tracy Kitts, Acting CEO of the National Business Incubators Association (NBIA), which bills itself as the world’s leading organization advancing business incubation and entrepreneurship. We had a few questions for him.
How do you meaningfully compare the outcomes of businesses that have gone through the incubator model and those that haven’t?
Researchers are continuing to try to look at the results of companies that go through a program in a specific community and those that don’t. There are just so many variables at play. The best we can do is to take a look at return on investment… Read more
Over half of all startups are dead in the water within 2 to 5 years. This certainly may help explain the exponentially popular appeal of business incubators and accelerators, which promise to boost the chances of individual startups to raise capital, get to a positive revenue stream and provide community benefits like higher regional employment.
There were about 12 incubators in 1980 and today they number in the thousands in the USA alone. Some of the most famous ones are Y Combinator or TechStars. Even governments are getting into the act: the Obama administration in White House has launched Startup America to facilitate public and private partners investing in American entrepreneurs.
In different ways, incubators and accelerators aim to leverage high-quality mentorship and access to funders to produce dramatically different results; but do these methods actually work? Read more
While researching a feature on business incubators and accelerators, we came across Chris Hexton, an entrepreneur with Invc.me who has been through the accelerator process and was able to share insight from his own experience.
Having recently progressed through the Sydney-based accelerator Startmate I can safely say that it has certainly been one of the most worthwhile experiences of my life – both for my startup and myself personally.
Before joining Startmate my business partner and I ran our own consultancy and Invc.me (our startup product) was nothing more than a pre-alpha prototype that we used internally. We had no real plan and no real momentum. Things are a lot very different now and, upon reﬂection, I feel there are there are three key things that we have learnt through Startmate that have changed our approach to building a product.
1. Focus. It’s not impossible to build a startup on the side whilst maintaining a day job but, having tried both, I can attest to the fact that spending 3-4 weeks solidly testing your concept and assumption with real customers is the best way to ﬁgure out if you startup has any chance of success. Bootstrapping is a ﬁne way to fund your startup but in the future I know I will always take a few weeks to spend 80% or more of my time validating a concept new concept before I go any further. Read more