There are only four reasons why anyone may agree to “invest” in a particular project – at least according to Danae Ringelmann, co-founder of donation-based crowdfunding site Indiegogo. These “Four P’s” of involvement should remind all interested campaigners what it takes to get funded. But these “P’s” aren’t limited to crowdfunding. No matter how you are raising money, whether for a business or a charitable endeavor, these are the things that are running through the heads of your potential financial backers.
1) Passion
The first “P” is for passion. Stirring the emotions of a potential supporter is the number one way to get someone involved in your project. A potential backer who cares deeply about your goals is much more likely to contribute to the cause.
2) Perks
Everyone enjoys getting something. For an equity investor, the perk may be a dividend. For a contributor to NPR, the perk may be as simple as a free tote bag. Even if the rewards are small, they matter.
3) Participation
Just being involved with a larger community of people is a huge draw to many people. Although you may have a better view of the football game from your couch, there is something about “just being there.” The same is true for backers of the fundraising campaign; they just like being there along with everyone else.
4) Pride
For your supporters, they are proud to be part of your campaign. Although there may be perks, sometimes the most powerful reward of all is simply being recognized on the list of participants. Seeing your success, and the recognition for their participation, gives a special kind of pride that only your backers can enjoy.
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.
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.
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!
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.
Cricca Funding 