Jorge Sanchez III Partner, Nouvantage.com, Crowdfund Beat Guest Contributor,
Running a successful crowdfunding campaign is largely dependent on having a well defined strategy. This relies heavily on having a clear understanding of the purpose of the campaign as defined by the problem that is being addressed. Differentiation in crowdfunding is currently defined by the type of offering being made in return for funds: debt, equity, reward, social good. However, it is imperative to the success of the campaign that there is a deep understanding of the campaign’s goals being applied in the strategic planning and execution of a campaign. Research by Younkin and Kashkooli (2016) has identified the four types of problems crowdfunding is currently attempting to solve: gatekeeping, coordination, patronage, inexperience. A particular project may be facing one or several of these problems. By having a better understanding of the problems being addressed, a more effective strategy can be designed and implemented to increase the probability of success.
The gatekeeper problem can be summarized as the inability of those with limited social capital and geographic disadvantages to access capital to fund new endeavors that may otherwise be attractive opportunities. These handicaps can severely negatively impact the feasibility of success for an opportunity that might have otherwise flourished. When people often think of crowdfunding, it is this problem that they often associate with it: broadening the scope of opportunities to find capital and source deals. This distinction between finding capital and sourcing deals marks the primary segmentation between the two types of platforms that aim to solve the gatekeeper problem: the entrepreneurial focused, and those created for investors. Platforms created with the investment seeker in mind, are created to facilitate fundraising opportunities and people that might not otherwise have had access to capital. The Investor driven platform’s purpose is to create an efficient and friendly means for investors to source and qualify deals coming from the wide scope of opportunities now available.
When someone is trying to raise funds through their existing network but face fears of social costs related to the possible event of failure, they are experiencing a form of the coordination problem. That is, not fully leveraging an existing network due to fear of social repercussions. For example, these types of problems occur for riskier seed stage investments where a social bond is needed to eliminate barriers stemming from the low expectation for returns. Crowdfunding platforms designed to tackle this issue work by creating a no pressure ask and utilizing social proof to activate more actors in the network. This increases the likelihood of success for crowdfunding campaigns designed to raise funds from within an existing network.
Disruption in existing revenue streams for cultural works has led to a demand for a business model that grants artists a reliable and recurring revenue source. The production of cultural work has historically been reliant on a patronage system where talent is identified, developed, and supported by wealthy individuals or establishments. The current motivation for patronage is the ability of the work to produce returns for those commissioning projects. Due to the disruption of the revenue sources for cultural goods, there is increasing pressure to develop solutions to diminishing revenue streams for cultural projects. Crowdfunding platforms have emerged to resolve this particular problem. These models are especially unique because they are designed to provide continual support for a creator over a period of time with no definitive goals.
As crowdfunding opens the doors for a greater base of people to pursue capital for opportunities, the proportion of people with little or poor quality of experience in the pool of investment seeking individuals is going to increase significantly. This has it’s own set of challenges that some crowdfunding portals are specializing in. These portals offer the promise of capital as well as assistance in other business functions like marketing, team building, infrastructure and leveraging the crowd in product development. These are the platforms that directly compete with venture capital funds by providing the experience founders lack that venture capital funds typically provide.