Crowdfunding Developments
The discussion last week about the real costs of crowdfunding raised some interesting points but glossed over the larger underlying issue. Crowdfunding relies on a hidden social contract which has not been explicitly stated openly: Entrepreneurs are expected to operate their projects at near-subsistence levels while relying solely on crowdfunds.
Crowdfunded ventures are at their hearts startups, and ought to behave like it. While project leaders have the luxury of using other people’s money rather than their own, funds are exceedingly limited and contributors expect success. Since most models rely on rewards rather than repayment, users are entitled to a piece of the output. Whether an album, DVD, or book, some product was usually promised to mid-level donors in exchange for their support. Many contribution agreements may not explicitly state that a project manager is not accountable for such an exchange if final goods are never produced. crowd-based investing has been criticized as an illegal exchange of securities by certain government agencies. Many donation-based crowdfunding platforms have not yet made clear the relationship between unfinished projects and users’ rights.
There may be a significant shift in the availability of funds and willing contributors for crowdfunded projects in the near future. The number of active projects grow daily, and on top-tier platforms, many if not most are finding success long before the funding period is complete. As with any platform, the initial enthusiasm will eventually wear off, leaving once eager contributors disenchanted. Given the limited selection of projects today, many users may simply be crowdfunding enthusiasts looking to experiment with a new socioeconomic model. This group will soon be far outnumbered by users who care about individual projects and arrive primarily from outside of progressive digital circles. When that time comes, competition will be much more fierce.
We’ve already witnessed the demise and collapse of many platforms in the past year, and although some have been resurrected, we may not have seen the complete fallout of these collapses. There may be a fundamental demand imbalance on media-specific platforms as well as a failure of marketing. Is SellaBand designed to attract investors interested in music or fans of individual groups who want to essentially preorder albums? The dual role of investor/fan confuses the audience as well as making targeting much more difficult. The real difficulty in these situations may lie with understanding the user journeys of contributors on these sites once their initial enthusiasm dies out.
As crowdfunding receives more mainstream attention, the influx of new lower-quality, poorly marketed projects will drive down the success rates on platforms. Will it also drive away more capable, responsible investors? Success at this stage will require leaner operating budgets to compensate for decreased availability of funds and contributors spreading out their interest. I suspect that early 2010 will be remembered as the golden age of crowdfunding by the first entrepreneurs, as nearly every well-managed project that could spark donor-interest was saturated with funds. Once users have more to choose from, things may get darker for individual projects.
Lower funding goals and increased accountability will also likely lead to a further stratification and specialization of platforms. Films produced under union specifications, for example, have very different budgetary guidelines that may not seem reasonable when compared with a lean online retail operation to uninformed contributors. Currently, there exists a benefit to centralizing contributors on multi-purpose platforms like Kickstarter, but with a geometric rise in projects and contributors, platforms like SoKap which is dedicated solely to films will likely see a significant rise in traffic.
The most significant role not yet filled in crowdfunding is marketing. While today a simple search for crowdfunded projects yields a manageable number of results, in the coming boom, discovering a specific project by browsing may be like finding the proverbial needle in a haystack. Just as search was augmented by content-driven ads, new channels will develop to drive traffic and interest in specific projects. I expect we will witness the rise of crowdfunding-specific marketing platforms and agencies in the next year. It should be noted of course that as adding a marketing budget is antithetical to leaner budgeting, these agencies must be content with a portion of future revenues.
