It’s called crowd funding. Customers invest sometimes as little as $1 in a product—often an album by a new musician, or clothes or jewelry from an aspiring designer. The customers then help promote the product by posting messages on the Web. Their incentive: a cut of the profits in proportion to their investment. They share in the risks as well, but each person’s risk is low because he or she is part of a crowd of investors.
A similar concept exists in charitable giving, in which people pool contributions, usually via the Web, to support various works and initiatives. But now some online companies have shown that such an approach may be fruitful for businesses, too.
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Consider SellaBand.com, a start-up launched in 2006. Unsigned artists set up a free page on SellaBand.com, where they can post as many as three songs. Visitors to the site then listen to the music free and can invest (with a minimum of $10) in artists they consider promising. When artists reach $50,000, SellaBand uses the money to help them produce an album of songs that are then sold as CDs and downloads through SellaBand.com and other online vendors.
Profit Sharing
Investors, meanwhile, are encouraged to help promote the music in online communities. It’s in their interest to do so: After costs and a 10% share for SellaBand, revenue from each album is split 50-50 between the artist and the investors. About two dozen new artists have been recorded since the summer of 2007. In the best case so far, investors have earned about $5 for each $10 they invested, says Johan Vosmeijer, chief executive and co-founder of Amsterdam-based SellaBand.com.
A similar business, Slicethepie.com, based in Reading, England, lets visitors to its site (www.Slicethepie.com) invest from $1 to $15,000 in albums the company helps produce, and earn a proportionate share of the album’s sales.
Additional benefits from such models: The artists can leverage a powerful distribution channel with no costs. The investors get to help influence what musicians become successful. The companies, meanwhile, get the biggest share of the revenue while offloading some of the risks and costs of promoting new talent.
Crowd Pleasers
Similar companies are emerging in the fashion industry, such as CatwalkGenius.com, a venture of Dublin-based IQL Ltd., launched in June 2007. Aspiring designers sell samples of
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The model is not new at all. It has been used in linking communities with private developers of commercial developments in Latino communities. The target market purchases stocks and derives a dividend and any other pre-arranged compensation on a quarterly basis. I believe the model described is a variant of the basic model where the consumer is the investor. What is interesting is the use of the net to raise seed and working capital for the ventures. And yes, there must be a strong bond between the developer and the community in order for the model to work.
The use of Crowdfunding is creeping into the technology field. Expect to see use of Crowdfunding to mitigate risk of new product development. Firms like Apple for instance, possess brand engagement with customers you want to be involved in the new iTablet, then donate to our new product effort, be involved in the up front design, and get an invite to the local Apple store for the launch…. Crowdfunding has legs for enterprises and for growing companies like software developer Trampoline Software, but risks are high http://www.crowdfundingcentral.com
An interesting concept! I’m curious if it would work in other faucets of business as well.
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Johanna Lasserton
http://www.zipboxmedia.com
It’s certainly true that this approach works best with products that people relate to, like music, etc.
We run investiere.ch in Switzerland – a platform that uses a crowd funding like approach for funding startups. What we find is that people can also very much relate to companies and in particular a charismatic team – even if the product they create is more technical (nanotech, etc.). It’s about co-creating part of the future in a certain field.
Hi,
Good article.
We’re just about to launch Crowdcube – http://www.crowdcube.com – which offers an equity return for people investing in small businesses. Uniquely, the Crowd can invest as little as £10 so we’re empowering anyone to be a business angel.
Another site to take note of is Kiva – http://www.kiva.org – the mother of all crowdfunding sites having raised an incredible $150m+ so far for small businesses in developing countries.