Why should crowdfunding only be for startups?

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Globe and Mail | Daina Lawrence | July 24, 2014

crowdfunding startupsCrowdfunding is a popular method used by startups to acquire financial backing for a company or even specific product, but it is not often thought of as a tool for established businesses.

Experts Daryl Hatton, CEO of social crowdfunding platform FundRazr.com, and Craig Asano, executive director of the National Crowdfunding Association of Canada, argue that larger corporations have barely begun to explore the benefits of crowdfunding.

Is crowdfunding just for startups?

Daryl Hatton: Not at all. Crowdfunding helps a lot of successful startups, but it’s not at all required that it be a startup. We’re seeing lots of new applications from local businesses that have been there a while, but want to launch a new product or service, or from enterprises that are looking at it to help them validate whether or not there’s a market for a new product that they’re interested in.

Related: 11 Essential Ingredients Every Crowdfunding Campaign Needs [Infographic]

Craig Asano: Crowdfunding is not at all just for startups. Whether you’re an individual, a small company or a big company, for-profit venture or not-for-profit, you take a look at the marketplace locally here in Canada and there have been successes in crowdfunding, but it’s been across the board. So it’s really an organization seeking to tap into the power of that crowd. Funding for the ideas is one major part, but it’s also this idea of social capital and networking.

What models of crowdfunding are available to established businesses now, and coming up?

DH: There are a couple of different models, but let’s start with the first one, which is the all-or-nothing funding model, where you set a goal and only if you achieve that goal do you actually receive the funds. You can use that model to test whether your product is interesting to a marketplace. By allowing people to order a copy of the product ahead of it actually being produced, if you get enough orders you say, ‘Okay, there’s enough demand,’ and will actually go and create the product. So large companies started to experiment with that, including companies like IBM. They were running internal programs where they were crowdfunding within the company to see which kinds of products would most likely succeed based on the responses of staff.

Related: Research: Crowdfunding Models: Keep-it-All vs. All-or-Nothing

There’s another model that’s starting to come out and it’s related to marketing a company, as opposed to product development. That’s the idea of taking the corporate social responsibility program project, where they’re putting money back into their community and turning that into a customer acquisition system. For example, if someone made a donation to a cause that was supported by the corporation, the corporation might give them a copy of the product in order to help increase the value of the donation. I know that sounds a little complicated, but imagine for a minute that you were going to give money to a local hospital and, in exchange for your donation, you got [an Internet] TV package from [a telecommunications company]. The cause gets some money, [the telecom] gets a customer and they’ve used corporate social responsibility methods to help build the brand in their community.

CA: There are two other points: The first one is using crowdfunding as a feeder system to acquire new innovation. While enterprise companies have research-and-development divisions, they are more expensive to operate and aren’t structured like startups, where grassroots innovation can happen in unexpected ways, sometimes from a tiny basement apartment. Enterprise companies, which source new innovations from these dynamic markets, benefit by acquiring early-stage technologies at a great price. I think it’s an interesting trend. Google is a good example of a large company using ‘intrapreneurship’ to crowdsource innovation from their employees. Google encourages employees to spend one day a week, or approximately 20 per cent of their work day, focusing on developing their own ideas, which is like running their own startup. If they come up with a brilliant idea, Google has the right to participate and owns a portion of the intellectual property, but as a model, I think it’s an amazing approach to how large enterprises can crowdsource innovation.

Related: IBM discovers its inner Kickstarter via enterprise crowdfunding

Another example is General Mills, a large consumer packaged-food company in a partnership with a U.S. equity crowdfunder called CircleUp. And basically the deal is, if someone comes up with new consumer packaged good, like a new cookie, a new peanut butter, something that’s a breakthrough campaign that’s seemingly a new idea and people support it, that through the partnership General Mills has an opportunity to reach out to the company and purchase it. And I think those are two angles – which involve system acquiring innovation – that may be cheaper or just a different channel to try marketing.

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