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.

Five rules for promoting your small business on Facebook

Social media sites like Facebook, Twitter and YouTube provide small businesses with inexpensive, yet effective means to promote their business.  Facebook, in particular provides an outstanding medium to increase your customer retention levels while also allowing you to use the power of social networking to reach new customers.  However, getting the most out of Facebook takes more than just building a profile for your business.  The following are five tips that should help you get the most out of your social media marketing via Facebook.

1)   Remember the “little details” like your address, hours of operations and phone number. While this may seem like a no-brainer, a surprising number of small businesses forget to fill out their “info” section of Facebook. Sure, your repeat customers already know where you are, but their friends don’t! Your business Facebook profile is (hopefully) going to be viewed by new potential business. Help them find you!

2)  Increase the size of your businesses social network. In Facebook, this primarily happens through the “friend” function. After setting up your business profile, your number one job needs to be getting your current customers to connect to you. Offer incentives to encourage your customers to add you to Facebook.

3)  Post, post, post! The Facebook wall is one of your cheapest advertising tools. Update your wall regularly to let customers know what’s happening at your location. Are you running a sale? A special event? Launching a new product line? Hosting a club? Promote the activity of your business with regular updates to your Facebook wall. Don’t overdo it, though! Multiple promotions a day will get lost in the clutter. Have a regular, but not spammy Facebook outreach strategy.

4)  Improve the quality of your customer relationships. A simple thanks for shopping goes a long way. When you have repeat customers who are also Facebook friends, take time to thank them for stopping in. You don’t need to write a 1000-word treatise, just a “thanks for stopping in and looking forward to seeing you again” is generally enough. Specialize the message when the situation warrants it. Being proactive with your customer contact turns out to have a double benefit on Facebook. Not only does your customer learn that you appreciate them, but their friends learn that they frequent your store and that you’re a friendly business owner.

5)  Reach out to your friends’ friends. While it’s important to get your customers to friend your facebook page, it’s just as important to get them to ‘talk’ about your business on Facebook. Every time your customers post information about your business to their Facebook page, you reach all of their friends. That’s potentially hundreds of warm leads for every referral. Develop promotions for your Facebook friends when they “like” one of your wall posts. Similarly, use promotions which encourage your customers to “share” your Facebook promotions to their network. Finally, whenever possible, encourage and reward “friend” referrals.

In the REO Speedwagon song, “Take it on the run,” the band sings about ‘hearing it from a friend who heard it from a friend who…’  That’s social networking in a nutshell.  We are all linked together in social networks.  Effective social media marketing is all about reaching out to your network of customers and then enlisting their help in reaching their networks.  The good news, for your business, is that it’s not just a friend who hears it from a friend.  It’s 10 friends who heard it from a friend and 100 friends who heard it from those 10 friends, and it goes on, and on, and on!

Censoring the Internet?

A good deal of attention has been paid recently to the promotion and subsequent demise (or at least delay) of SOPA and PIPA.  Collectively, these two bills proposed a fundamental new approach to policing intellectual property rights on the Internet.  The furor over the bills, rightly, focused on the lack of due process involved, the incompatibility between the laws themselves and the technology driving the Internet, and the criminalization by association of ISP’s and content providers built into SOPA/PIPA.

It is frightening how close these bills came to passage with minimal public discourse.  Even more alarming is the strong, bipartisan support each bill enjoyed prior to the major Internet outcry.  Even with much of that support eroded, a significant number of members of congress support SOPA/PIPA.  With SOPA/PIPA more or less dead in the water, focus should be turned to the reason these bills existed in the first place.  Because of these reasons, we will see more of the same in the near future.

Some attention is currently focused on greed as a determinant.  Primarily these charges come from the more extreme SOPA/PIPA opponents, indeed some of these opponents are openly guilty of the piracy and copyright infringement that SOPA/PIPA were designed to combat.  These charges, though, miss the point in the larger debate.

The larger debate is an ongoing battle over the meaning of Intellectual Property in a globalized, digital world.  Virtually every advanced economy offers some form of market protections for inventors and creators in the form of patents and copyright.  Unfortunately, various countries have different standards for IP protection and the Internet exacerbates this problem due to the ease of rapid proliferation of digital works.  Further, our current copyright laws are highly confusing.  So much so that it is quite possible that the author of the SOPA bill himself may have committed copyright violation on his own website.

This fundamental right protects the creator’s ownership of IP, enabling them to leverage supernormal profits during their protected period.  While this seems like an affront to basic free markets, it is an affront commonplace in market-based, capitalist systems.  Further, if it is an affront, it carries some very well defended proof of need.  Lacking such protection of creative IP, market forces actually work to erode IP profitability – so much so that the costs of creativity generally exceed profits in a non-protected market.

In short, we need some form of IP protection.  The questions that emerge are how much, for how long, and in what form?

This is an incredibly important topic for small business, and business in general.  The Internet, in its current form, opens the door to many small businesses.  Whether we are talking about self-publishing e-books, writing apps for mobile devices, selling goods, or any number of other fronts, small business is thriving on the Internet. 

Given that neutral parties assess the overall economic damage from piracy to be rather trivial, we should take great caution before passing an act like SOPA/PIPA.  Effort should be made to protect IP, however that actions should take the form of standardizing IP definitions across countries and working to establish multi-national agreements to protect IP and enforce actions against extreme violators. 

At the same time, we should engage in a discussion of length of protection for IP.  Our current length of IP protection is based on a print economy wherein travel and publishing time ate into the profit potential period for the creator.  Given advancements in production and distribution technologies – and indeed due to the instant distribution capabilities of the Internet, we probably need to shorten (not lengthen) the window for copyright protection. 

We do need to remember that IP protection has a beneficial purpose.  While there are vested interests on both sides of the current debate, we need to work towards some form of simple, standardized, enforceable IP protection. 

SOPA/PIPA was not what we needed and worse, both bills may still come back.