The Crowdfunding Revolution: Social Networking Meets Venture Financing

118 Pages·2010·2.18 MB·English

by  Kevin Lawton

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Copyright © 2010 by Kevin Lawton and Dan Marom
All rights reserved. Except as permitted under law, no part of this publication may be
reproduced, distributed, or transmitted in any form or by any means, or stored in a database
or retrieval system, without the prior written permission of the authors.
Self-published.
Design and Editing by Kevin Lawton.
Cover photo by Mark Wragg (www.markwragg.co.uk).
We appreciate corrections and feedback (find us at www.thecrowdfundingrevolution.com).
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First e-book edition, October 19th, 2010.
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Thoughts about Crowdfunding
“All our Sports and Entertainment investment opportunities provide investors with
guaranteed emotional return, skin in the game and a chance to literally own and trade a piece
of the action. Fans own a piece of that hand on the steering wheel or gripping that putter.
They get bragging rights down at the Pub, telling their mates at the Bar that they have a piece
of the next Indy 500 or US Open contender, or up and coming Film Maker up there on the
TV.” ―David Tomlinson, ThrillCapital
“Influencers drive crowdfunding campaigns. These curators of cool ideas are poised to
become the new power brokers.” ―David Geertz, SoKap
“Beethoven + Social Media = Crowdfunding for the modern Creative. Welcome to the re-birth
of patronage.” ―Brian Meece, RocketHub
“VC in your CV can’t be avoided.” ―launch countdown messages, Grow VC
“I believe that the power of any resource ― especially funding ― is magnified when it comes
from a supportive community of people. Capital is no longer just capital, no longer just a
means to an end. It is a fundamentally different thing: it is an expression of a community’s
best intentions, their hopes for the future, their desire to participate in making that future a
reality. It is a statement of their belief in the recipient of that capital to lead the way.”
―Jessica Jackley, ProFounder
“To be an alternative for existing investment opportunities is our ambition. To democratize
innovation and to create a demand chain economy are very important aspects of our future
vision.” ―Gijsbert Koren, CrowdAboutNow
“We set out to create a site that would fuel charity between friends, families & neighbors.
Local Search is the next step towards that goal.” ―Brad Damphousse, GoFundMe
“Creating the software, vaccines, buildings, services, fashion and food that will allow the
planet to grow stronger while empowering those living their days on income barely enough to
buy a large coffee is the grandest business opportunity of our lifetime. The power of
crowdfunding to enable this opportunity will transform the investment and charitable
landscapes.” ―Josh Tetrick, 33needs
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“In a world dominated by rogue bankers and dishonest brokers, crowdfunding returns the
economy to some semblance of a meritocracy. We are all investing time in media and we
should be getting a return based on that investment. By eliminating the gate keepers we can
all run free.” ―Max Keiser, PirateMyFilm
“What could be a better antidote to the toxic complexities and financial engineering that
caused the credit crisis than the simplicity of people agreeing to lend and borrow between
themselves, for matched terms, at rates they agree together. And sharing the profit a bank
would make.” ―Giles Andrews, Zopa
“The power of the net is its distribution capability. Tell a story as singular, but the reception is
plural. For capital formation, this is a highly efficient mechanism, subject to proper
methodology, practice, compliance and integrity. Crowdfunding is a natural evolution, but its
success will be solely based on the appreciation of existing financing disciplines applied to the
web environment.” ―Steve Cinelli, PRIMARQ
“We are proud to be India’s first crowd-funding platform (india.growvc.com) and considering
that it is here - where the start-up culture is just reaching an inflection point towards high
growth - that will give us and other platforms some important lessons and learnings to define
the future of this powerful medium.” ―Satish Kataria, Springboard Ventures
“Crowdfunding and financial services are irrevocably interwoven. For practical adoption, a
platform needs to protect and enable all parties involved. This will require progressive
securitization initiatives to allow for capital to flow across geographic boundaries and provide
the scale for even the most abstract ideas to prosper.” ―Fred Bryant, WealthForge Inc.
“We launched our crowdfunding platform in 2008 to give everyone the opportunity to get
great ideas funded. Now anyone in the world has the opportunity to create a project, offer
unique incentives, and generate more funders faster. IndieGoGo customers in over 130
countries have received millions of dollars through their campaigns - it’s time for YOU to be
next.” ―Slava Rubin, IndieGoGo
“Crowdfunding is offering today, new and more efficient ways for small and medium
enterprises to finance their growth without giving equity away. It also allows smaller
investors to invest in private companies, democratizing these type of investments and making
them available to a much broader audience.” ―W. Blanco and H. Flutto, Cofundit
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About the Authors
Kevin Lawton | Kevin is a progenitor of PC virtualization (now a multi-billion dollar cloud-
related industry), many-time startup entrepreneur, trend-caster and visionary blogger at the
intersection of biz & tech (trendcaller.com), contributor for VentureBeat and SeekingAlpha,
public speaker, prolific idea creator, protagonist of two open source projects, and news,
innovation, economics and business book junkie. Kevin holds a B.A in computer science from
the State University of New York at Oswego, and started his career at MIT Lincoln Laboratory
in space-based radar and satellite communication.
Dan Marom | Dan is a PhD candidate in Finance at the Hebrew University of Jerusalem. He
has been highly engaged in R&D and management for several years, as a technologist and a
CEO and co-founder of a startup company. Although currently concentrating on academic
activities (researching and teaching), Dan is also involved in several technology ventures as a
consultant. Dan holds a MBA (Cum Laude) and a B.Sc in electrical Engineering.
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To the first nation which fully empowers crowdfunding
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Table of Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART I : The Road Here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Rise of the Crowd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Decline of Established Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Decline of Outlier Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Emergence of Early Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Rise of Crowdfunding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
PART II : The Road Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Infrastructure and Ecosystems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Prediction Markets, Mining Collective IQ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Intersection with Crowdsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
New Investment Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Regulation & Policy Directions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Epilogue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
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Introduction
Ask not what the world needs. Ask what makes you come alive... then go do it.
Because what the world needs is people who have come alive. ―Howard Thurman
“Crowdfunding describes the collective cooperation, attention and trust by people who
network and pool their money and other resources together, usually via the Internet, to
support efforts initiated by other people or organizations”1, as defined by Wikipedia. That’s a
pretty good start, although the true social vibrance of crowdfunding is difficult to capture in a
definition. The crowdfunding space is quite diverse, comprised of many niches, and shares a
lot of social networking’s energy. Whether to solicit donations and create a fan base for an
around-the-world sailing adventure, to pre-sell copies of a book, or to finance a startup in
return for equity, some form of crowdfunding is available. Just how encompassing
crowdfunding is, speaks to the enormity of its potential for economic and social impact. In
the same way that social networking changed how we allocate time, crowdfunding will change
how we allocate capital.
Never before has the human race truly integrated the collective wisdom of our now 7 billion
person crowd, with mechanisms to allocate capital. Yet 2 billion (or more) people already use
the Internet, and usage penetration is increasing rapidly2. Until this moment in our history,
capital allocation was largely the province of a relatively small and entrenched minority.
Given the lack of available mechanisms to coordinate otherwise, and the relatively slower rate
of historical change, our systems necessarily coped. But with the exponentially explosive
growth of connectivity and complexity via physical and social technologies, the classical
human-to-human (h2h) networks and centralized planning of capital allocation are folding
and becoming dysfunctional. What are weaknesses of the old methods, especially the sheer
scale and volume of information and ideas, are strengths of a new model of funding which has
the potential to tap an almost unfathomable collective intelligence to process this collective
complexity. Therein lies the immense future of the crowdfunding revolution.
To the more recent generations, thoughts of days without social networking are only a subject
of amusement and story telling. In the same way, future generations will likely grow up with
crowdfunding and wonder how venture financing functioned any other way. So many socio-
economic changes which have already taken place, were accompanied by fervent disbelief,
often from the incumbents. There’s no reason to believe that crowdfunding will be any
different. But one only has to look around to see the major shifts enabled by modern
technologies. Book publishing, just to pick one, has been radically transformed by the ability
to publish electronically. In fact, my co-author Dan and I live some 12,000 kilometers apart
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and have never even physically met. That would have been nearly impossible, not long ago!
More broadly, the entire media industry has undertaken systemic change, often begrudgingly
integrating with the electronic age of social networking that we live in.
In 1865, a young French sculptor named Frédéric-Auguste Bartholdi went to Versailles, where
he had an inspirational conversation with Edouard de Laboulaye, a prominent historian and
admirer of the United States. De Laboulaye observed that the first centennial of the United
States would occur in just over 10 years, in 1876, and thought it would a kind gesture if France
presented America with a commemorating gift for the occasion. Bartholdi had the inspiration
of a giant statue, one that he would spend many years involved with, of a woman called
“Liberty Enlightening the World.” The statue itself would be paid for by the French people,
and the pedestal that it stood on would be financed and built by the Americans. 3
Years later, Bartholdi founded the Franco-American Union, a group of French and American
supporters, to help raise money for the statue. And he recruited Alexandre-Gustave Eiffel
(who later designed the Eiffel Tower) for its design work. But the centennial date approached,
the project was behind time and it was difficult to raise the funds to build the statue in France.
Bartholdi et al. continued anyways. Then in 1880, they had the idea of holding a ‘Liberty’
lottery. Fortunately, French law permitted lotteries for charitable and artistic causes, and the
French government authorized the lottery. Among the prizes were models of the statue. It
took time, but the crowdfunding efforts on the French side ultimately succeeded.
On the American side, things were not going well. The U.S. Congress didn’t want to provide
funding for the pedestal, and neither did New York. As pieces of the statue were built, they
were shipped to America, where they were used as tourist attractions to raise money. But that
didn’t raise enough. In 1883, when the U.S. Congress voted down a new attempt to provide
funding for the pedestal, Joseph Pulitzer, publisher of the New York World was outraged. He
launched a funding campaign in his newspaper. But his then reader base was not very large,
and produced very little in donations. As things broke down, other states began competing
for the location of the statue. But, as Pulitzer’s reader base grew, he made another attempt,
and repeatedly implored readers to donate, appealing to charity of the masses, no matter how
poor. This time, the campaign started producing results. When it was announced that the
ship containing the statue’s crated parts would leave France, a new wave of donations
occurred. Soon, work on the pedestal was re-started. The funding efforts captivated the
entire country, money poured in, in however small quantities people could give. The World’s
circulation exploded, and at one point enjoyed the honor of being the most widely read
newspaper in the Western hemisphere4.
There’s a fantastic and historical poster from the American Committee in charge of the
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construction of the Base and Pedestal, which solicited donations in the following way, “Every
American citizen should feel proud to donate to the Pedestal Fund and own a Model in token
of their subscription and proof of title to ownership in this great work.” What’s even more
intriguing is that they used a two-tier ‘perks’ approach, $1 scored you a 6" statuette, and for
$5 you got a 12" statuette.5
Sometimes, when you have a dream, it takes an inspired crowd to help make it a reality. We
feed off of your hard work, vision, energy, momentum, and oh, don’t forget the multi-tiered
perks strategy!
According to the late Peter Drucker, “Every few hundred years in Western history there occurs
a sharp transformation. ... Within a few short decades, society rearranges itself — its
worldview; its basic values; its social and political structure; its arts; its key institutions. Fifty
years later, there is a new world. And the people born then cannot even imagine the world in
which their grandparents lived and into which their own parents were born.”6 This is a book
about such a transformation.
Come with us on a ride through time. It illustrates the diminishing function of conventional
venture financing mechanisms, vital to an understanding of the emergence and value of
crowdfunding. The ride then travels through the current crowdfunding landscape, and ends
up in a vision of a powerful new social and economic future. Many of you helped shape this
ride and we hope many more will do so along the way. We deeply hope you are inspired, and
become part of what makes crowdfunding’s future great.
As this book is really more of a living document, always a work in progress, we encourage
meaningful feedback. It helps advance the line, as does your purchase. Welcome to our book,
and to our crowd!