This post focuses on the impact that FinTech is having on product innovation, traditional corporate development and brand loyalty. It covers a quick overview of the Financial Technology (FinTech) ecosystem, notable crowdfunding applications in the corporate world by public companies and what lies ahead for private brands as the regulatory environment changes for equity crowdfunding.
FinTech has many segments including but not limited to Digital Wealth Management (aka Robo-Advisors), Crowdfunding (Rewards, Donations, Equity), Alternative Lending (P2P), Digital Currencies (aka Bitcoin) and Payments.
Fig.1 – FinTech Landscape Overview. Source
Crowdfunding & Blue Chips
“Crowdfunding represents an entirely new pathway for building a company with innovative products and services”
Fig. 2 sample companies utilizing crowdfunding. OurCrowd & CircleUp are crowdfunding portals similar to online VCs
Blue Chips are nationally recognized, well-established and financially sound companies. The notable examples below showcase various partnerships that big corporations like GE, Johnson & Johnson and Procter & Gamble have forged with crowdfunding portals like Circle Up and Our Crowd since the passing of Title II of the JOBS Act in 2013 and recent ventures launched by the likes of Sony, Etsy and Amazon leveraging crowdfunding mechanics.
Key Takeaways & Notable Examples
Public companies are using crowdfunding in the following ways:
I. Corporate Development: M&A Targets, JVs and Licensing Deals
Big companies are partnering with crowdfunding portals as an innovation play that enables them to find smaller, nimbler and innovative companies as acquisition or partnership targets.
“Ideas. New, innovative product ideas. And access to entrepreneurs that are building those ideas into companies, so that it can ostensibly buy those companies.”
Sample Pairs – Blue Chip | Crowdfunding Portal
“What you’re seeing with GE is a foreshadowing of where the world is going,”Jeff Pulver, Co-Founder and Chairman of Zula”
II. Innovation Play: R&D support for new product development
- Companies like Procter & Gamble are using crowdfunding to enhance focus groups with trend analysis on product categories using investments by the crowd as a signal for economic viability. It’s important to note that investors via Circle Up (a crowdfunding portal) are not necessarily consumers of the end product that gets commercialized by the blue chips.
- Companies in consumer goods can also shorten their product development lifecycle to 3 months with crowdfunding vs. 18 months in a traditional cycle.
Sample Pairs – Blue Chip | Crowdfunding Portal
- Sony | Their Own Crowdfunding Portal. Sony has dabbled with crowdfunding in the past — using sites to float an e-ink watch and mesh sensor kit, and most recently its much-anticipated Shenmue 3 title — but now the Japanese company is making a big play in the space after launchingits own site for crowdfunded projects. Source
“Circle Up provided P&G trend analysis on 18 categories, including pet foods, beverages, snack foods and infant products.”
III) Social Responsibility: connect with customers and employees
Any corporation with web traffic can and probably should enable their customers & employees to donate to causes they care about and match those donations to an extent. Most of my previous employers had annual drives with the United Way. This builds goodwill with the local communities as well and makes it easier for customers to support your brand. Naturally employees would develop stronger connections to the overall corporate mission, vision and pride.
Sample Pairs -(Dick’s Sporting Goods) | Own Portal
Dick’s, is a Fortune 500 American corporation in the sporting goods and retail industries headquartered in Coraopolis, Pennsylvania is an example of a socially responsible corporation that hosted their own donations crowdfunding portal directly on their website.
IV) Customer Acquisition & Exclusive Distribution Channels
- to reduce friction in the customer acquisition process by keeping an audience captive. For example, “Found on Etsy” was designed to let product makers move from fundraising to retail sales without leaving the site.
- to be the exclusive distributor of a newly crowdfunded product a la “Amazon Exclusives” or to incubate new products and enable sales by providing eyeballs like Amazon Launchpad.
Sample Pairs – Blue Chip | Crowdfunding Portal
- Etsy | Their Own Crowdfunding Portal
- “Etsy is a peer-to-peer e-commerce website focused on handmade or vintage items and supplies, as well as unique factory-manufactured items”
Premium & Exclusive Offerings
V) To reverse the airline trend and turn $2.4MM into $2Bn
They say that the quickest way to turn a billionaire into a millionaire is to have him/her start an airline. Obviously kidding here, but the most successful and controversial crowdfunding exit to date — Oculus Mask acquired by FaceBook can claim to have turned $2.4MM received from the crowd into a $2Bn+.
Brand Loyalty Redefined
From the trends above, it is clear to me that ANY company or organization could use the same mechanics if they had access to cost-efficient technology to do so. With the exception of Dick’s Sporting Goods and arguably Sony, the examples above may lead to marginal increases or maintaining the status quo on the level of brand loyalty impact.
brand loy·al·ty noun: the tendency of some consumers to continue buying the same brand of goods rather than competing brands.
The picture below summarizes my take on the potential brand impact given where the crowdfunding campaigns are hosted and the total consumer benefit as a function of three independent variables: early or discounted access to a product, social good and financial upside (e.g. equity investment).
You can now say, right. But aren’t folks paying for eyeballs when they go list their products on Amazon or qualified investors when they work with Circle Up? The answer is yes and Amazon is a great service to the startup launching the next best gadget. The question is, did that decision also increase brand loyalty? Also, circle up has a rejection rate of 90%+ and rightfully so. They have to stay picky as they describe here because they’ll be judged by their returns and the quality of companies they provide to investors and partners. In the case of Amazon, the companies are not raising capital from their customers. They are simply using Amazon to sell their products which I’d also do if I had a hardware product. So increasing sales and brand loyalty can be mutually exclusive in this case and for good reasons since boot-strapped startups may never be able to reach the same distribution power as an Amazon.
For analysis purposes, we can cluster the notable previous examples into three categories:
- Marginal brand loyalty |Big Party: five parties are involved in the transactions done by circle up and our crowd. They include the crowdfunding portal, a product startup (e.g. Oculus), the public company (e.g. Facebook), the end consumer and financial investor. The key point here is that the investor may or may not be an actual customer or consumer of the product so brand loyalty can and most likely remain the same holding all other factors constant. Sure, the brand can be perceived as more innovative given an acquisition or partnership deal but there’s no sentimental attachment or additional vested interest whatsoever.
- Marginal brand loyalty | Small Party: in the cases highlighted for Etsy and Amazon, the relationship is no different than a storefront and a web shopper. Customers buy new gadgets from privately-held product companies listed on Amazon. So there are three parties involved and no investors present in this case. For “Fund on Etsy” in particular, you can also support a funding campaign and get the product at a discount directly from the seller. Hence it’s slightly higher and to-the-right position on the diagram.
- Additional Brand Loyalty | 1:1 Meeting: in the case of Dick’s Sporting Goods additional brand loyalty is developed since consumers are donating to causes they care about. The same is true for Sony since they could build the crowdfunded projects that solve an unmet need. In this case, there are only two parties, the customer and product company which also happens to be the public companies. Both, Sony and Dick’s, are hosting their own campaigns and making relationships stickier. No investment is made so brand loyalty is still lower vs. the maximum amount possible in this model if a customer also had skin in the game (e.g. stock).
What if regular customers & non-customers were allowed to not only buy products and services but also donate, invest and lend directly on the private company‘s website which in turn would create new jobs?
FundPaaS is one company doing just that. It enables any private business owner to launch and host their own crowdfunding portal, which includes running background checks on investors, creating legal documents such as a Private Placement Memorandum (PPM) and regulatory filings, automating paperwork via e-signatures and handling money transfers into an independent 3rd party escrow services held at FDIC Insured Banks. Examples of their early adopters include Real Estate Developers, Small and Medium Sized Businesses, Broker Dealers and Startups.
One potential way to also increase brand loyalty is by increasing a customer’s switching costs thereby making it easier to continue buying the same brand rather than competing brands. The catalyst we need is a new type of investor that supports the brands s/he loves. A custvestor (noun) is a customer of a privately-held business that provides a product or service that s/he consumes AND aninvestor in the same business. In addition to being a cost-efficient, faster and friendlier source of capital for Small & Medium Sized Businesses (SMBs), private companies will also benefit from additional resources provided by the same vested consumer. In addition to capital, these could include the following examples:
1) Customers turned promoters: startups using t-shirts and laptop stickers as cheap and effective marketing. Similarly off-line promotion via word of mouth and online social media channels are obvious ways that consumers will help the same brands where they donated or invested their money.
2) Customers turned mentors: I am guilty of this. As I’ve helped tea houses owned by Sherpas on the Mt. Everest Basecamp trail, set up their own Trip Advisor pages or food places that I frequent with tip or two on accounting, marketing and technology matters. I believe that if good rapport exists between a small business owner and customer, mentorship can naturally take place. Most of the most successful VCs are also gret mentors. Beware, of course, of nasty investors who’d want to get into every detail of your business. For that reason, the ‘crowd tranche’, the portion of a business capitalization table typically reserved for the crowd, is usually a single line item with a general partner representing the interests from those investors.
3) Customers turned networking hubs: customers that are invested in the brands they love can facilitate intros to vendors, industry experts and other investors since there’s mutual benefit (more so if financial gain is attached of course).
New Rules, New Game – Equity Crowdfunding in the United States over time
As of the summer of 2015, there are 17 states that have approved crowdfunding exemptions and 21 that will soon follow. These rules make it possible for a regular customer to also invest in a privately-held business. Also, at the federal level, Title IV (aka Reg A+) of the JOBS Act in the USA made it possible for anyone to invest in a privately held business within certain limits (usually 10% of your income if you are not accredited).
A “CustVestor” – a new type of investor
In the near future, there will be better ways to raise capital, build brand loyalty. For established businesses with high transactional volume or web traffic that are looking to expand, however, converting their own customers into investors is probably a good place to start since trust already exists and incentives can be aligned as there are no disconnects between random accredited investors, consumers and investors in a private label. They are all the same when an customer is turned into an investor.
A little bit about me
- I am a FinTech Entrepreneur living in the SF Bay Area. I love all things FinTech related and have a particular interest in financial literacy and crowdfunding as means to generate social wealth and close income, education and gender gaps.
- For FinTech consulting inquiries dealing with Robo-Advisors & Crowdfunding projects, you can reach me at firstname.lastname@example.org.
- If you are a corporate brand, small business, real estate developer and would like to learn more about how to launch your own crowdfunding portal or automate investor onboarding, you can reach me at email@example.com.
- You can also find me on Twitter @bamilcar, @FundPaaS or connect directly on linkedin by clicking here.
Bibliography | Credits
Quotes from URLs embedded. Not mine
- Plain Format: My voice, the colloquial | plain english way that I write with pipes |, parenthesis ( ) to simulate conversation pauses and appease my attention deficit
- References & Image Credits: logos belong to the companies referenced, most of the images are linked to the articles from which they were sourced. Same goes for Sources
- The article’s Backdrop, JOBS Act Primer, CustVestor, FundPaaS, Logo Collage and Perceptual map are created by me and you are welcome to use them.