Crowdfunding: It’s not just about the money

Yesterday I left the cosy warmth of our HQ and went to Dresden to catch up with Seedmatch, a startup company helping other startups get seed financing by means of crowdfunding. While I’m still in the process of compiling all the material I’ve collected yesterday (watch out for the full report next week), I wanted to take a couple of minutes to think about what the possible motives for micro-investors are.

When you hear the words seed and funding and read about them in a commerce blog, most of you will immediately begin to think about money. This is quite understandable, when all that seems to matter to journalists and the audience out there is how many financing rounds there were last week and who has scooped the biggest pile of cash. (I’ve also written a tiny little rant about it recently.)

Crowd dynamics

When you add the word crowd to it, things become more interesting: People like you and me can become micro-investors and, rather than putting their money in the bank, support other companies and ideas and purchase a tiny little piece of them. This process can develop astonishing dynamics:  Lingoking, the last company presented by Seedmatch, collected 100,000 Euros within just 5 hours. About 140 people invested in the easy-to-use translation service that makes it easier for businesses to overcome language barriers but is also used by regular people to make their travelling a little more comfortable.

Platforms such as Kickstarter also benefit from those crowd dynamics, propelling some of the proposed projects into inconceivable heights. As a matter of fact, people are willing to pledge more than $1 million in total for projects such as an iPhone Elevation Dock and the Double Fine Adventure computer game. In contrast to Seedmatch, however, people do not participate in the companies directly but rather get a special goodie if the funding gets through and the products and services in questions come to life.

Customer sovereignty

So, what do those examples have in common? Or rather, what makes regular people back those ideas with their money? Interestingly, as I learned in my talks with Seedmatch CEO Jens-Uwe Sauer and others, it’s not primarily because of the prospect of additional profit (in the case of crowd-funding). It’s because people want to be in the driver’s seat and help pushing ideas and companies into the market which they would like to see there. Rather than waiting for a random company to deliver product X or service Y at some stage, those who dedicate themselves via one of those platforms want to actively push them. So we could actually view this type of engagement as the empowerment of the customer made possible by means of a) an easily accessible web platform and b) a fundamentally open approach on the side of the producer: only if product or investment ideas are made public at an early stage, the crowd approach can work (which of course makes those models very susceptible to cloning/copy-catting, which we will have to talk about at a later stage).

Spreading the word

Those flocking to Kickstarter, willing to pay more than $10K for a few extra-nice mobile phone docks are of course a rare breed, and the same principle won’t probably apply to washing powder or car polish. Yet, for those types of products, the backers are human marketing machines of the sort every company would die for: They spread the word, they provide ideas and criticism. Because of this audience, using crowdfunding as provided by Seedmatch and others means very effective marketing at the same time. Outspoken micro-investors talk about their investments, encouraging others to do the same. And if this happens within a short period of time, blogs and mainstream media will pick this up and provide the startup company with an additional publicity boost.

In other words, there’s much more to this type of investment than just cash – a very welcome breath of fresh air in an all to VC-dominated startup world.

(Image by Anirudh Koul)

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