Three Reasons I Don’t Like “Crowdfunding” Individuals

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There is a growing emphasis on the idea of crowdfunding for both startup and established companies. Two new online companies, Pave and Upstart, are making crowdfunding personal.

These sites allow backers to invest in the income stream of other people. The idea is that prospects, generally young people at the front end of their career, can get some upfront money in exchange for future personal earnings. The usual deal exchanges 7-10% of the prospect’s income over the next ten years.

For a young person that needs money now, this exchange seems like a good idea. Throw in the fact that the investors are also going to become mentors (both because it is at the center of both the websites’ models, and because it makes good business sense), and some of these relationships can pay off for everyone involved.

But for at least three reasons, I think that this idea poses a real downside to everyone – backer, prospect and society at large. And in the long run it poses a threat to the success of crowdfunding.

The first reason has directly to do with prospect. When you are young (and most of these prospects are in their 20s), money “feels” so much more valuable. Generally speaking, the income of this group is very low, at the same time they are trying to make their way. Credit card companies target this age group, because quite frankly, young people make terrible credit decisions, making the credit card companies millions of dollars in interest and fees.

Of course, everyone makes terrible buying, investing, love and other decisions in their 20s. But that’s just because young people don’t have the experience to know better. Contrast that with someone who may be a backer (investor). These people are generally older, wiser, richer, more successful – and while they are not necessarily smarter – they are more experienced. And they are more savvy than the average prospect.

The penalty for being younger, more desperate for money, and less experienced is that the average prospect is going to get a bum deal. I don’t like the idea of generational theft, burdening young people who should be buying houses and starting families for the benefit of successful, experienced investors.

The second reason that I am not a fan of crowdfunding people is that it places a premium on betting on young business people, further diminishing the value of lower-income people to the society. It further devalues the contributions of musicians, writers and other cultural contributors. Sometimes these people aren’t financially recognized in their lifetime. The price of art often dramatically increases after the artist’s death.

The third reason is that Pavers will be a lot less likely to get mentorship and guidance that is really in their best interest. For example, if the prospect (and the world) is better off because they decide to backpack Europe, go back to school, or just take a lower paying job for the experience it offers, why shouldn’t they? Well, the backer is not going to suggest that they do things that will pay off for the prospect in 20 or 30 years. The backers want to get a return on their short-term investment. So mentorship will be skewed in favor of the backer’s own personal financial interest.

I strongly applaud Pave and Upstart for being very creative in the crowdfunding space. I also think that it’s valuable to reward mentors with financial benefits. However, if we set up a system where young people are “rented ” for a while, we will all be worse off for it. And if people start thinking that crowdfunding is synonymous with modern-day sharecropping, then the political support for a critical new funding mechanism will completely erode.

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Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which will be published in May, 2013.

Doing the Wave

Back in the early 1980, there was a cheer made popular by University of Michigan students during their football games. Entire sections of students would stand and cheer while raising their hands, sit down, and then the next section would do the same thing. The effect was what looked like waves of people moving throughout the stadium. This gave a great visual effect and engaged the crowd every time that it started. Wave leaders would get a couple of the most raucous student sections (usually those including the band) and after a few tries, the rest of the sections would pick up on the wave and it would take off through the stadium.

The Wave grew very popular after it caught on during Detroit Tigers games as they won the world championship in 1984. By that point, everyone in America had learned the Wave, and it became common at sporting events. By 1986, the Wave was being done at the World Cup and it became a global phenomenon.

The reason that the Wave was popular is the same reason that the Internet has spawned so many popular memes. A meme is an action that spreads throughout a society. In the Internet age, most “memes” are Internet phenomenons that have users joining strange activities, just to be part of the crowd. Flash mobs were “the” meme a few years ago. During the 2012 London Olympics, it seemed like every athletic team in the world went online and did the same dance to the Carly Rae Jepsen song “Call me Maybe”. And recently, the Internet has lit up with tens of thousands of videos of people copying a jump-cut YouTube video done by a group of Queensland, Australia teenagers to the song “Harlem Shake”.

So why? People like to stand out from the crowd. But more importantly, they like to be part of the crowd. In a new world where relationships are created and maintained online, these bonding experiences are important. Memes are way in which a virtual Waves can be created online. It allows people to participate in crowd will not even leaving the safety of their computer.

I am a close observer of the crowdfunding space. Memes are proof that the power of crowds is the coming attraction of Web 3.0. Marketing is not about messaging anymore. It is about engaging. And soon businesses are going to have to learn to leverage the latest memes to ride the newest virtual Waves.

The University of Michigan does the “advanced” wave. Counter-clockwise twice, once in slow motion, once at double speed, once clockwise and then split into two counter-waves. Don’t try this at home!

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Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which will be published in May, 2013.

Fall into the Gap

One of trickiest marketing challenges is to understand the gap between people that are 30 years old or younger, and the folks that are 50 years old or older. Back in the 1980’s, the clothing store The Gap ran an iconic television campaign with the slogan (and catchy song) “Fall into the Gap”. The people who remember that ad, like me, fall into both worlds.

If you are 30 years old or younger, you probably don’t have a landline telephone and may not have cable television service – you use Netlix and Hulu. You may have a number of things in your house, but one of them is most definitely high-speed Internet service. You use your mobile phone frequently. You are well trained on the ways to communicate using emoticons and acronyms. And there is some chance that you’re reading this article.

Contrast about with someone who is 50 years old plus. You probably have Internet. You probably don’t know which speed your Internet is – you just know that it is the cheapest option you could select from your cable provider. You probably have a smart phone, but you mostly use it for making telephone calls. You might also use the calendar feature. When you out with your friends, you couldn’t imagine “checking in”, or sending a picture to the world on Instagram. In short, the world you live in has changed, but only around the edges.

But that leaves an important gap. How do you market to the people in between? You know – the 30 to 50 year olds. A smart marketer will understand that these gappers. The gappers don’t know quite how to use social media, but they try. These people use Facebook to maintain relationships, but they are almost with people that they met in the real world. The gappers watch TV still, but they will occasionally be found watching YouTube.

Defining the age that is going to make up your target market is critical. A younger demographic requires a marketer to embrace social media and develop a deeper relationship with followers who are likely to share their habits with their online network. An older demographic still responds to traditional advertising which uses classic marketing positioning like sloganeering and sales. The middle group responds to a little of both.

But remember what you’re trying to do. In many cases the medium is the message.  

Don’t Fall into the Gap with Run-D.M.C. – http://youtu.be/yoleRFfAwMs

 

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Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which will be published in May, 2013.

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