Features
5 Jan 2016

Corporate crowdfunding

Despite its roots in the launch of small, individual products and businesses, crowdfunding can be a powerful tool in the hands of a large corporation, explains Dr Kevin Berg Grell

Popularised by creative ventures, especially by recording and performing artists, crowdfunding has heralded the dawn of democratised SME and real estate finance. While funding volumes keep on surprising researchers and academics, showing exponential growth across most verticals, a new group of crowdfunders have entered the stage; established and large corporations such as Sony, Coca-Cola and IBM are starting to use crowdfunding for marketing, innovation and CSR efforts.

 

There is no doubt that major companies have woken up to the fact that crowdfunding, crowdsourcing and related ideas have huge potential and are here to stay

Lars Kroijer

With contributions from 11 industry insiders, my co-editors/authors Dan Marom and Richard Swart and I recently published Crowdfunding: The corporate era (Elliott and Thompson, 2015). The book provides an early snapshot and analysis of how online financing and in particular crowdfunding show great potential for large enterprises. In one of the case studies, we explored how Sony is integrating crowdfunding into its product development and R&D.

In the past 12 months, three product ideas that came out of Sony’s seed acceleration programme have been tested via crowdfunding platforms such as Indiegogo before prototyping. This procedure is aligned with Sony’s ambition to de-risk product development, and since our book was published the company Forbes values at $34bn (£22bn) has taken this one step further. It has announced the launch of First Flight – a crowdfunding platform owned by Sony that is exclusive to product ideas coming out of the internal seed accelerator programme. While this move is a testament to crowdfunding’s applicability beyond fundraising, it raises the question: is crowdfunding the future of product development for large enterprises?

Lars Kroijer, managing director of London-based Allied Crowds Ltd (a research company focusing on crowdfunding in emerging markets), explains the recent development like this: “There is no doubt that major companies have woken up to the fact that crowdfunding, crowdsourcing and related ideas have huge potential and are here to stay. While we are still in an exploratory phase of the industry, much like with the dawn of the internet itself, the major companies are trying various ways to harness the power of the crowds to enhance products and services.”

Beside the direct operational benefits, Kroijer believes that keeping up to date with the development in crowd business models is integral to attracting talent. He continues: “By staying ahead of the innovation curve those same companies are more attractive places to work and they are thus able to attract a higher calibre workforce, which in turn creates a positive cycle with company output.”

CREATIVE VENTURES AND VIDEO PITCHING

In 2003 ArtistShare launched one of the first platforms for online crowdfunding. Its scope was to cater to the needs of recording artists, but the platform quickly grew to include performing and visual arts as well. Performing arts projects have had a leg up on the competition from the beginning because their traditional pitching format (video) was a good match for online audiences.

To this day, visual content still dominates audio and written content in terms of virability, and for that reason, the video format has become popular and commonplace outside performing arts projects; even for investment proposals where investors in the past have based their decisions on business plans, pitch decks and, essentially, the numbers.

Securities regulators worldwide have expressed great concerns about crowdfunding, and one of the reasons for this is that unsophisticated investors might not be able to seek out – and focus on – the relevant information; too much focus on videos rather than the financials is expected to lead to poor investment decisions. In the UK, the FCA has taken the approach of regulation “not to deter investors, but to provide more customer protection” as Ellie Clayton explains in FCA brings in crowdfunding rules (economia online, March 2014).

Besides being a carry-over from the early days of crowdfunding, video pitching serves three purposes for companies looking for capital. Firstly, it demonstrates a company’s transparency, showing specific products/services, and the team behind them. Secondly, it can support early branding, storytelling, and customer identification. Thirdly, the video format (sans manipulations) allows companies to show how far along the R&D process they have come.

There are, however, problems associated with video pitching. Most commonly, video presentations, and animations in particular, can leave the impression that product development is at a more advanced stage than it really is or that the process of completing the project is without substantial risks. This problem has prompted crowdfunding platform Kickstarter to disallow animations and graphics that could be misconstrued as actual videos and images of finished products or prototypes. Whether intended or not, the use of highly-convincing visuals presents a serious and costly challenge for many reward-based crowdfunding platforms. A recent initiative to overcome this issue forces campaign creators to include a risk disclosure in their campaign materials, even for reward-based crowdfunding.

Does the video format present an entry barrier in itself? Certainly, some campaigners still trust in the self-made presentation, but professionally-styled videos (often deliberately created to look unpolished) run up additional cost for the campaigner. In this sense, producing crowdfunding pitch materials can be relatively expensive compared to pitch decks, infographics, etc. Besides the financial hurdle, some founders are simply not comfortable with broadcasting themselves, and it is safe to assume that many avoid crowdfunding for exactly that reason.

Taking all of this into account, large corporations with in-house resources should be able to leverage various skillsets to create the perfect pitch to the targeted audience. Furthermore, established companies are typically better equipped to set up the most efficient distribution channels at the lowest cost to the customer. Being more experienced with R&D planning, campaigns run by large enterprises should also show less delivery risk compared to start-ups with their first product still in the development pipeline.

A semi-related issue pertains to moral hazards including managerial negligence induced by pre-selling campaigns (such as potential misuse of funds and/or time). Creatives and SMEs can overcome the signalling issues related to such challenges by showing that a substantial funding amount comes from friends and family, and hence the perceived risk of managerial negligence is reduced. The large enterprise cannot rely on friends-and-family funding on the same scale. It does, however, have an advantage insofar as the brand is at stake: the higher the brand value, the lower the perceived risk of managerial shirk, because a drop in brand value adversely impacts the enterprise across all activities.

SME STORYTELLING

Why have we not seen large corporations jump on the crowdfunding wave sooner? One possible explanation is their size and the importance of sharing a sense of urgency with the crowd. Some campaigners get this part terribly wrong and entrust that “e-begging” will work for companies as well as it does for individuals in dire need. This is, of course, not the case for any company; and for large corporates even less so.

Why should I finance Sony’s product development? In a sense, customers already do, because a considerable portion of the gross margin from the existing portfolio carries over to fund new products. The question therefore becomes, should my purchases today finance the development of a specific product of my choice (which is the case with reward-based crowdfunding) or the development of products that the enterprise chooses?

The trade-off potential crowdfunders face is between a more accurate product fit (development budget is allocated based on interest in a specific product) and the time-preferences of money/consumption (product is delivered several months after it has been paid for). In this regard, Sony’s reward-based crowdfunding initiative is very similar to pre-selling campaigns, where companies typically offer steep discounts to incentivise early adopters. In return the company gets a strong signal about the market potential, and can allocate production capacity accordingly.

When we look through the comments of crowdfunders it becomes clear that the crowds divide between those who are excited to be a part of the R&D of large corporations, and those who do not appreciate the idea that large enterprises might ask for donations. The latter criticism ties back to the common misunderstanding that crowdfunding is driven by donations. For reward-based crowdfunding this could not be further from the truth. In fact, reward-based crowdfunding has more in common with pre-selling campaigns than with donations.

INTERNAL INCUBATOR PROGRAMMES

A final challenge relates to the campaigner’s ability to create a sense of urgency. For creative ventures and (most) SMEs, the outcome of a crowdfunding campaign will often be the one factor that determines whether a particular project will materialise. I have previously described how SMEs deploy crowd-first tactics to reduce exposure to inventory risk and “market-misfit” (Wired.com, Startups and Crowd-first Tactics).

These tactics can be vital for a small company seeking market and product validation, but for a large enterprise most of us assume things are very different. In fact a company like Sony actually faces the same problem – but for thousands of product ideas, rather than a handful of projects per year.

Sony has done something very clever in this regard. In early 2014, the company created an internal incubator, Seed Acceleration, based on the creative talent and knowledge-base within Sony. The programme is under the direct control of Sony’s president and CEO, Kazuo Hirai. Every campaign that can be listed on Sony’s platform, First Flight, must grow out of the Seed Accelerator. The challenge is of course to convince the crowds that their contribution (or support) is critical. To this end, Sony has created a mechanism that dictates that success on First Flight is necessary for further development. In this way, the campaigner is a small team of “intrapreneurs” which cannot leverage the strength of the enterprise unless the crowd is on board.

Sony’s first campaigns launched less than 12 months ago, and the First Flight platform has only been live for a couple of months, so it is still too early to say exactly how well the strategy will pan out. What is undisputable, however, is that Sony (along with other large enterprises) has recognised crowdfunding’s potential for information sourcing. The ability to align more accurately with public interest and demand is clearly one of the most important aspects of any marketing effort, and it seems like Sony has a head start with the launch of its First Flight platform.


Kevin Berg Grell, PhD, is CEO of APEN Designs, Inc. and co-author of Crowdfunding: The corporate era


 

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