Crowdfunding transforms business investing, spreads risk
Crowdfunding is not just for cash anymore.
Danae Ringelmann, co-founder of Indiegogo, the world’s largest crowdfunding website, said what was once thought of as a niche funding mechanism is now attracting businesses and projects for countless reasons.
“Indiegogo is actually a lot more than an alternative form of financing,” Ringelmann said. “It’s doing something very fundamental in the whole financial equation, and that is it reduces risk and specifically market risk and execution risk.”
Ringelmann shared her experience July 28 at the Anchorage Economic Development Corp.’s Crowdfunding AK forum, held at the Bear Tooth Theatrepub in Anchorage as part of AEDC’s annual Entrepreneurship Week.
Almost all startups share three types of risk, she said, the first being funding. Naturally, crowdfunding mitigates funding risk by allowing a project or business to be pitched to millions at once rather than to just a single boardroom.
When crowdfunded, a startup’s market risk dissipates as funding grows, Ringelmann explained. Being funded by hundreds or thousands of individuals from every corner of the globe proves an idea’s merit from the get-go, she said.
And even more specifically, crowdfunding allows entrepreneurs to conduct market research while improving their pitch for dollars.
The “perk” feature of crowdfunding cures much of the execution risk associated with launching a product. It can be used to determine the optimal size a product should be or the exact features it should have to reach peak demand, she said.
Ringelmann described the transformation of the Misfit Shine, an activity tracker funded through Indiegogo. She said the entrepreneur behind the “world’s most elegant activity monitor,” as it is advertised on its website, offered different colors of Misfits as perks for investing in the product. In the end he found that his funders were willing to pay $50 more for a black Misfit than a silver one.
“It’s a way to get smarter faster,” Ringelmann said.
Further, while the Misfit was originally designed as a sleek, button-style device — an alternative to wrist-worn activity monitors — his funders began asking for it incorporated into jewelry and a new product line was born, Ringelmann recalled.
“When people part with their dollars it’s a much greater indication in terms of what their true interests are rather than what they say in terms of would they buy or fund something,” she said.
As the hidden features of Indiegogo and crowdfunding have become unveiled themselves since it launched in 2006, the platform is continuously being used in new ways, Ringelmann said.
Crowdfunding is being incorporated into pitches for traditional financing because of its ability to ease the market and execution worries of banks or venture capitalists that were previously largely unknowns during the funding stage of a startup. She explained that often when a funding milestone is reached with traditional financing a crowdfunding campaign will be launched to solidify market interest and determine the overall amount of capital needed before it is all invested.
Even large, established businesses are getting into the crowdfunding game. Marvell Technology Group, a large multinational semiconductor producer worth nearly $5 billion, used Indiegogo to test a new line of code writing software, Ringelmann said.
“(Marvell) used Indiegogo to raise $50,000 — they surpassed their goal a little bit — only because they wanted to test the market and see if they were making something the world wanted in the way that they wanted it,” she said.
As crowdfunding continues to evolve, Ringelmann said she believes it will force the investing scene to evolve away from cash being the ultimate bargaining chip and towards it being another commodity as it is available from more sources.
In the traditional financing game those with cash had the power and were sought after because they were a startup’s only option. She said that model is shifting.
“What’s happening is now the sources of capital have to add more value than just being the sources of cash,” Ringelmann said.
As cash becomes less important, banks and venture investors will start to emphasize the intangibles they can provide that distant crowdfunders cant, Ringelmann said. She predicted that the future of traditional financing will be less about providing cash and more about using the value of relationships and expertise to win the opportunity to invest in a project.
“I do see a symbiotic relationship going on between Indiegogo and the crowd and traditional financing,” she said.
While crowdfunding is mainly a way to attract capital today, tomorrow it will be an “incubator of ideas,” according to Ringelmann. “What we’re trying to do is build this ecosystem where everyone can fund what matters to them.”
Elwood Brehmer can be reached at [email protected].