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  • Industry: Retail, Food, Drink & Consumer Goods
  • Type: Business and industry issue
  • Date: 12/14/2012

The kindness of strangers 

The kindness of strangers
Crowdfunding has helped rock stars and tech entrepreneurs. Could big business be next to feel the benefit of lending from customers, not banks?

Prog rock pioneers Marillion are known for many things: the cut of their denim, the length of their locks and once having a singer known as Fish. Their influence on the world of business funding is less reported, but the veteran British band kick-started a movement that threatens to revolutionize the way companies raise money.


In 1997, shorn of Fish and with their record company reluctant to pay for a US tour, the band raised US$60,000 by asking fans for pledges in return for a live CD. Two years later, 12,000 of them pre-ordered an album that hadn’t even been recorded and the band ditched their record company altogether.


Crowdfunding was born, and is currently making its influence felt in everything from gaming to food service. Today’s donors want more than a shiny disc and a letter of thanks, of course: crowdfunders receive priority service, future discounts or equity. Tech firm Pebble caused a splash this summer by raising US$10m (including US$3m in just four days) to take an internet-enabled watch to market through website Kickstarter. “We had tried to raise money through the normal routes, and it didn’t really work,” says founder Eric Migicovsky. “You don’t really want to spend your time talking to venture capitalists – they’re just guys with money. You want to spend your time talking to customers.”


Sites have launched across Europe, as well as Brazil, Australia and Japan. The Jumpstart Our Business Startups (JOBS) Act legalized crowdfunding by non-accredited investors in the US. Research company Massolution says crowdfunding platforms raised US$1.5bn for a million different campaigns in 2011, a figure it expects to double in 2012.


These nimble businesses are accessing funds in double-quick time, at reasonable terms, making them genuine challengers to bigger rivals, though the industry remains in its infancy. More than half of Kickstarter projects fail to reach their funding targets. Relatively few crowdfunded ideas have turned into viable businesses. But the idea has enough traction to pique the interest of more than just start-ups: as established medium-sized businesses struggle with access to funds, whether through bond markets or banks, they may be tempted to open themselves to all-comers. Though multinationals’ shareholders would be alarmed by a large-scale crowdfunding exercise, allowing a subsidiary to explore engaging customers directly could boost engagement and garner good publicity.


“By avoiding the traditional route to market, growing businesses maintain autonomy and raise capital fast,” says Liz Claydon, Head of Consumer Markets at KPMG in the UK. “It offers a new way for companies with strong ideas but no track record to gain momentum. But traditional backing comes with support that shouldn’t be overlooked.”


The wisdom of crowds is well established. Companies including P&G and Kraft have used online techniques to engage customers and business thinkers in problem-solving. US engineering business Rite-Solutions pioneered the concept of an internal market, where ideas are floated and ‘traded’ by employees at all levels, with incentives for those who back winners. The company has an instant, and impressively reliable, barometer of which innovations are worth pursuing, and the revenue to prove it.


To close-minded executives, crowds are a nuisance. And it’s true the current vogue for collaboration can be as much about good headlines as best practice. But when businesses can pick up substantial funding – and a loyal customer base – at the click of the mouse, you don’t need long hair and loud guitars to think the old way might have had its day.


LESSONS FROM CROWDS

  1. Anticipation is the best publicity

    Apple unveils products with deliberate secrecy; Pebble ‘seeded’ its watch through crowdfunding.

  2. Crowds work both ways

    P&G’s Connect + Develop program generates ideas, but also licences products to its new allies.

  3. You don’t know it all

    Rite-Solutions’ CEO didn’t like its new educational game. The internal market did. It made US$1m.

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