Crowdfunding Matures


As February featured both the bankruptcy of and the kick-off of its bookish equivalent, the crowdfunding business model has been in the center of attention again. Is the bankruptcy of SellABand a sign the business model that helped Obama become president is flawed? Is the model still viable once the newness wears off? Or did SellABand suffer from making a couple of simple beginners mistakes of the kind innovators just happen to make? I am inclined to say that the model can work but it requires a bit of fine tuning. I guess, this month’s news shows that fine tuning is just what the market is doing right now. Kickstarter, may be one of the ‘winners’ because of its clever experience design with a strong community focus.

The idea of crowdfunding is that a group of people pool money together to make something happen. This has a long tradition in charity but it is now entering other fields like music, film and book industry. SellABand was a major innovator in this. In 2001 founder Pim Betist started spinning on the idea of funding artist in a ‘Friendster style’ resulting in the website in 2006. The idea behind SellABand is that (a large group of) fans invest in an album yet to be produced and if the Artist succeeds in raising enough money the album will be made. At that time the music industry still had a very centralized model. The Industry did everything needed to make money from music: scouting, investing, producing and marketing. Recording and marketing a CD cost’s about as much as a house (250.000 euro’s), so the centralized model only works when there are enough revenues from CD’s. Following the Napster revolution those revenues from CD’s collapsed and the centralized recoding industry model was in peril and crowdfunding seemed to be a clever alternative.

I can dream up about 3 major advantages of crowdfunding over the centralized music industry model (and I am confident that these apply more generally).
1 The ‘dry’ financial risk of making an album gets lower. The 50.000 euro’s that needed to be pledged are no longer part of the investment risk.
2 The projects that go trough have a flying marketing start since the crowd that funded the album has strong ties with the artist. Once the record is there these people will act as ambassadors, generating word of mouth advertising.
3 Following James Surowiecki’s Wisdom of Crowd’s logic, a large group of investors is better equipped to choose which music will sell than a single music scout at a large music company.

The SellABand example shows that these advantages may not be enough. (1) A lower risk, does not mean there is no risk. The fundraiser will have to have low cost and sufficient margins in order to be sustainable (SellABand didn’t do well on this). (2) Now marketing is needed to get the first group interested enough anyway (as rap group Public Enemy found out). (3) not all crowds of investors follow Surowieki’s criteria for wise crowd’s; there may be a need for community rules to prevent crappy bands to get elected anyway.

Of course I do not know how solves these difficulties. But judging from the press I would say there is only a small difference between the cost involved in publishing the book and the amount that needs to be pledged (both are around 10000 euro’s). In addition tenpages charges a small fee for books that do not get elected to cover transaction costs. (2) Tenpages has bookstores as partners that promised to do additional promotion on elected books, thus not soley relying on the initial crowd to do the work and also not having to invest in this marketing themselves. (3) tenpages has rules for their crowds: funders need to pay, funders cannot pay too much (preventing sugar daddy to fund the book) and there has to be minimum amount of supporters per book. These rules are intended to ensure the quality of the ‘crowds’ decision.

Another young crowdfunder (since april 2009) is Kickstarter. Kickstarter is a fairly generic crowdfunding platform. ‘Any’ type of creative project can get funding. The project owner needs to set a goal, a date and needs to organize the funding itself. Payment is done trough Amazon’s payment system; pledgers on failing projects are completely refunded. Kick-starter focusses on community building by the pledgers, rather than ‘financial’ rewards for the pledgers (these are optional). Also they have an ‘all or nothing’ rule and show how the funding is going so far in relation to the goal and the deadline. This is clever experience design. Also the projects kickstarter host’s have a fresh feel about them (designing obama is a nice example).

At this point it is too early to decide wether the newcomers have ‘sorted it out’, but looking at these initiatives the concept of crowdfunding seems very much alive and these new players seem to handle it an a mature way. In any case Mashable has good advice for those who want to try the model (and anyone else doing anything else).

Be authentic. Work hard. Deliver. Communicate.

N.B. SellABand may continue as the company has been aquired by german investors

One Response to “Crowdfunding Matures”

  1. 1 Living Without Money « @koenvanturnhout MacroBlog

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