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Will Crowdfunding and Crowdsourcing Replace Traditional Investing?

Crowdfunding Today

The financial crisis of 2008 left in its wake unemployment, bankruptcies, and most of all shattered confidence. Institutions, fearing for their bottom lines more than ever, tightened their screening processes. This had the unpleasant side effect of excluding more people from funding – anyone with relatively unknown track records or weren’t “high-profile” enough to meet the already-shaky confidence of investors.

The days of the crisis were already behind them – but the chaos it had caused continued to echo through the air.

This is where crowdfunding came in. Budding entrepreneurs without the energy or the resources to convince these jittery investors, turned to crowdfunding communities. There were definitely interested communities out there, willing to fund the project. Crowdfunding had effectively rendered the investor obsolete.

What of Crowdsourcing?

Crowdsourcing itself is not a new concept. Online encyclopedia Wikipedia could be considered as a famously large example; its 5.7 million articles in English and millions more in other languages are all written by volunteers. One of them, Steven Pruitt, has singlehandedly edited a third of all the English language articles on the site and written 35,000 originals – all for free.

Several business models have also sprung up around the very concept of crowdsourcing. Uber provides ride-sharing services from anyone with a car instead of their own employees; freelance services marketplace Fiverr connects businesses to freelancers around the world.

Increasingly, businesses are also employing crowdsourcing as a tactic for customer engagement. Formerly relying on focus groups, businesses have increasingly employed tactics in marketing campaigns in various forms. From naming an upcoming product to soliciting feedback on social media, these are just some ways businesses are beginning to hand the reins over to the consumer. However, this has backfired (link) on some occasions.

Despite the shortfalls of crowdsourcing and crowdfunding, there is no denying that these two has made it easier to do business when done right.

Out with the old, in with the new?

A bag of trash.

The “gatekeeper” – in this case, a traditional investor, is responsible for curating the businesses that receive funding. Through their own expertise, they judge whether a business is able to profit. Receiving funding is therefore a “stamp of approval”. In the traditional funding model, a business typically will cede a portion of control to their investors. In exchange, the business gains access to continued expert support. Attracting investors can however prove to be an almost Herculean task, which has led to the rise in crowdfunding as a workaround.

It needs to be said – The success of the crowdfunding and crowdsourcing model doesn’t make sense at all. People are placing their trust in project creators across the world, who are effectively strangers. This opens the doors to a whole realm of information asymmetry and its associated problems. Yet it has been shown that in a group decision setting the crowd more often than not are able to get things right.

Though you may not need a study to prove that it works, at the end of the day. The success of the crowdfunding model to this day is sufficient testament of this. Crowdsourcing marketplaces like Fiverr and Uber have also established themselves as dominating forces upon the crowdsourcing model. The number of crowdfunding projects having surpassed their funding targets without investor involvement raises one question.

Are traditional investors/ practitioners no longer needed?

The answer? Despite all of that, no.

The Shortcomings of Crowdfunding

The problem of crowdfunding is that the volume of money involved, and the “public wallet” can only go so far. With an increasing number of projects vying from the same pool of backers, it is only inevitable that more projects fail to grab any attention as part of the “crowd market validation” process. However, another phenomenon known as “crowdfunding fatigue” has also begun to gain attention.

Crowdfunding and crowdsourcing are also inherently associated with a “wild west” connotation. Most crowdfunding projects don’t succeed in reaching their funding goals – with an average of 36% on Kickstarter alone. This rate drops further to an abysmal 20% for tech projects. Now bear in mind that we haven’t accounted for what comes after. Many backers have been stung after a campaign by delays, failed projects, or even scams. While this in itself is already a cause for concern that platforms are trying to address, there exists another issue; numerous backers, particularly “early-stage” ones, have been shown to gradually fall off crowdfunding (See section 5: Understanding Backing Patterns). This is due to their higher propensity to fund projects with lesser due diligence, which translates to higher rates of failures they experience.

Initial Coin Offerings (ICOs) which emerged in the past few years in tandem with cryptocurrencies have further concentrated this “life cycle” into a conflagration of scams and failures. It is not a stretch to say that this has harmed mainstream blockchain adoption beyond that of the early adopters, likely to be enthusiasts. Of note is the recent revelation that even ICOs are increasingly seeking funding from institutional investors in order to meet funding targets – and perhaps to lend credibility to the project itself.

Alternative Models

It remains clear that the different fundraising models all have their own roles to play. Crowdfunding should be treated as an alternative to traditional fundraising, rather than a replacement.

What needs to be replaced are the ways we currently interact with our communities.  And listening to the community has never been more important than ever. Audiences, in particular “millennials” – anyone born in the 80s to the early 2000s, who would have grown up alongside the Internet and technology, are reining in control on what they want to see. Brands increasingly need to keep their customers involved yet under control, fostering a sense of collective ownership.

Marketers and community managers alike have blurred the lines over the past years but have never been able to truly erase this divide. With a decentralized model that encourages collective ownership rather than the “buyer-seller” relationship we see in current models, this may soon be a thing of the past.

 

 

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