Crowdsourcing and Crowdfunding - the business structure of tomorrow?

Alright, so I have recently bashed the JOBS act for it's frightful reduction in transparency allowances.  But, it's rare for a law in Washington to be all bad and JOBS certainly has its nicer elements.  One of those positive elements is the new freedom given to crowd sourcing.  Basically, a small firm can raise up to $1mm in capital with minimal documentation or due diligence.

Wait a minute, you are probably thinking, doesn't he have a problem with the transparency elements of JOBS, but just praised a different piece of transparency reduction in JOBS?

Yep, I just did.

There is a world of difference between two engineers sitting in a garage with an idea (the good part of JOBS) and a firm getting ready to have its stock publicly traded on an exchange (the bad part of JOBS).  The former is really where discontinuous innovation emerges, the latter is a company joining the ranks of "big business."  If you can't afford to behave like a big business, you aren't ready to go public.  That means you need audits, you need disclosure and you need accountability.  But that was the point of my last post.

Crowd sourcing technically applies to a wide range of activities.  It includes open source initiatives like those behind Linux and Apache web servers.  It also applies the innovation research awards like the Ansari X Prize which eventually culminated in SpaceX and the recent Netflix award.  Crowd source projects, like iStockPhoto have caused significant revenue discontinuities for professional photography.  While some might quibble that these projects weren't truly crowd developed, they do represent a very different form of organizing than that common to modern industry.

The more recent innovation, the one the JOBS act positively influences, is the emergence of crowdfunding.  Made popular by Kickstarter, crowdfunding is in some ways a high tech manifestation of the very low-tech world of microlending.

In the crowd funding format - specifically the Kickstarter variant, people start with an idea and ask for money.  This is a cash infusion, but without an equity or debt stake.  Rather, the project managers make promises of what will happen at specific funding levels.  People (literally anyone) consider the pitch from the project manager and decide if they want to chip in.  Kickstarter uses an "all or nothing" funding model.  Either the project raises its 100% goal (it can go over) or its not funded.  Project managers basically promise perks the their sponsors, but the sponsors do NOT become owners or in any way receive financial returns on their contribution.

As an example, consider Muneca Mexicana Handcrafted Food.  The project started with a $1250 funding goal to help kickstart a small foodmaker/caterer.  At the time of this posting, Minerva Orduno has actually exceeded her funding goal by quite a bit.  She has $2710 raised with 19 more days to go.

[NOTE - I am NOT advocating for/against contributions to Muneca Mexicana - this is merely an example of a Kickstarter project]
What has she promised to funders?

Those pledging $10 receive a 4oz jar of handcrafted caramel
Those pledging $20 receive the above and a 16 oz jar of Chorizo seasoning
Those pledging $30 receive both of the above and an 8oz har of Mole Poblanao sauce.

It goes on with different perks up to $250.

Her project proposal notes that investments beyond the current $1250 goal will go towards a catering license, insurance and potentially her own physical location.  Given where the project currently sits, Minerva will certainly be able to expand her inventory and potentially move towards her higher end goals.

Don't make the mistake of assuming Kickstarter is only geared towards restaurants and food.  There are currently 71 technology projects seeking financing with other categories of projects out there.  Several kickstarter projects have exceeded $1mm startup funding and last year Kickstarter projects accounted for roughly 10% of angel capital investment.  This helps grow small business startups and small business is really where the jobs are.