One of the premises of this blog is that the success and methodology of open source are not one-offs, but part of a larger move towards open, collaborative activity. Thus, by observing what open source does well – and not so well – lessons can be learned that can be applied in quite different fields.
Previous posts have looked at obvious extensions of the open source idea to content, data, government, science etc, but there's another domain that has embraced many of the key insights of the open source way, with striking results: the world of crowdsourcing and, in particular, crowdfunding.
Here's how a new report "A Framework for European Crowdfunding" defines this field:
Crowdfunding can be defined as a collective effort of many individuals who network and pool their resources to support efforts initiated by other people or organizations. This is usually done via or with the help of the Internet. Individual projects and businesses are financed with small contributions from a large number of individuals, allowing innovators, entrepreneurs and business owners to utilise their social networks to raise capital.
The parallels with free software are clear: a collective effort and pooling of resources, coordinated across the Internet. Again:
The rise of the crowdfunding industry over the past decade comes from the advancement in web and mobile-based web applications and services. Entrepreneurs and businesses can utilise the crowd to obtain ideas, collect money, and solicit input on the product, overall fostering an environment of collective decision-making and allowing businesses to connect with potential customers.
The report also makes an important point about motivation that obviously maps directly on to open source:
Profit maximisation as a goal is rare in crowdfunding, for now. The risk of failure does not necessarily translate into risk of loss of capital, because success is for the funder usually not defined through financial return.
Some people are primarily interested in investing in projects that share their own values, that are locally engaging, or that create jobs in their community. Others have a real knowledge of the market a project or company is addressing and desire to bring funds and expertise to the success of the project, very similar to business angels and venture capital funds.
The report identifies correctly some of the key ancillary benefits of this collaborative, open approach:
Besides raising money, crowdfunding allows the project owner to gain feedback on some of the most critical parts of the product before its release into the public marketplace.
For example, the project owner is able to gauge pricing information, demand for the product, feedback on how design might be improved, demographic on potential buyers, precise information about market demands, and direct customer interaction. It can also lead to word-of-mouth recommendation and other social marketing.
For the project owner, crowdfunding establishes a direct link between himself and the customer. This link is the first step towards marketing, customer loyalty, participation, and emotional attachment to the product.
Crowdfunding is an incredibly effective way of gauging if their product or idea has a mass appeal. Even more important is the time in which the project owner is able to make this assessment; a two-month long crowdfunding campaign is a relatively fast turnaround for getting an idea off the ground.
For project owners who experienced a successful crowdfunding campaign for their first round of financing, the aforementioned benefits can be extremely useful for a second round of financing. Some project owners may utilise crowdfunding again, where others may resort to more traditional forms of investment, like venture capital or business angel investing.
It also picks out other advantages that underline its connection with open source development:
Crowdfunding denotes space for co-creation and the involvement of the end-user in the product definition, a greater pool of innovative ideas and a free word-of-mouth marketing channel. It is also an investment channel for collective wisdom, replacing investment decisions by individual investors or individual fund managers acting based on their personal understanding of or experience with any given market.
The report notes that crowdfunding has wider benefits for business and society, because it avoids the kind of monoculture that has plagued both software and finance:
We hope the crowdfunding industry evolves into a structure where market share is significantly less concentrated than in incumbent financial services. Numbers show that the banking industry is run by a select few organisations who widely dominate the entire market. This situation can create the ‘too big to fail' financing model, where the largest institutions bear the risk of making the whole system collapse on default.
Regulators and the public should stand for building a crowdfunding industry where no single player can possess overall market share, both in volume and in numbers of projects funded. With more than 200 platforms present in Europe today, there should be ample room to achieve a higher level of diversification and resilience of this industry.
Systemic risks recently encountered by the financial system would be lowered by the intrinsic nature of the crowdfunding industry to operate as highly inter-connected networks.
Alongside estimates of the current scale of crowdfunding, both in Europe and the US, the report offers a number of concrete suggestions for government policy that would promote crowdfunding. It also has a small bibliography, but no links to relevant Web sites, which is a pity.
All-in-all, this report is a useful introduction to a fascinating world that derives most of its power from the dynamics underlying open source, although sadly this is not mentioned anywhere. It will be useful for anyone interested in finding out more about how the methodology that is busy turning the world of software upside-down can be applied to the field of business funding.