littlegreymatter

[littlegreymatter]

Crowdfunding : A Multidimensional Perspective

The Crowdfunding bubble may have burst in the past decade, yet the concept is still in it's infancy and its potential unrealized. The term crowdfunding may have a specific definition, however, so far, it truly hasn't taken into consideration the two factors that made it  - Crowd (Investor/Consumer) and Funding (Financial Management). From a marketer's perspective, value creation is an implicit rule for any product or service and crowdfunding lacks a targeted approach to lure in investors as it is still positioned as a medium for altruism, rather than being consumer-centric business model. A consumer with a vested interest in a particular project would be a better prospect for a long term investment. Lets understand this through a famous Kickstarter case - the Veronica Mars Movie. Veronica Mars was a television series that ran from 2004 - 07 on UPN (CW). It was cancelled abruptly without providing a satisfactory ending for the fans of the show. On march 13, 2013, Kirsten Bell and Rob Thomas, the protagonist and the writer of the series, started a campaign to fund the movie which would provide a long awaited ending to the franchise. The project was set up on Kickstarter, providing a comprehensive subscription funding model for the investors along with attractive incentives. They set the goal of 2 million dollars through crowdfunding and it was achieved within 11 hours of the launch of the campaign. Ultimately, it raised about 5.7 million dollars and turned out to be the fastest project to reach $2 million, the all-time highest-funded project in FILM category and 3rd highest-funded project in Kickstarter history. While it may not seem to impressive in terms of amount raised, the big picture, so to speak, is that it is possible to cultivate long term investors and consumers who are directly or indirectly related to a project. The marketing efforts required may range from a simple STP analysis to a comprehensive marketing plan executed effectively to yield maximum result.

This model has been modified & adapted for many worthy projects, one being raising funds for clinical research of the orphan disease Amyotrophic Lateral Sclerosis. I am sure everyone remembers the youtube videos of ALS Ice bucket challenge that went viral in 2014 to an extent it became a global trend overnight.

The ALS association didn’t only raise 220 million USD from this marketing effort, they were able to make progress in R&D by developing a better understanding of the protein mechanism involved and counteracting with stem cell therapy to mitigate disease progression in mice. This is also rare & significant in terms of marketing as an undifferentiated targeting strategy yielded a better result than any concentrated targeting strategy had done earlier. Let us move onto the funding or the financial implications of crowdfunding, which are quite revolutionary. I believe that crowdfunding can bring about a change in the very fabric of investment management by introducing transparency for the actual investors as well as wealth management professionals. I’ll use the example of the 2015 Oscar nominated movie “Big Short”, where the 2008 sub-prime housing loan crisis of US is explained through the term Collateralized Debt Obligation (CDO), a financial instrument containing mortgages, bonds, loans and other debt instruments as collateral. A CDO gets constant return on investment which is almost similar to mutual funds with one fundamental difference being MF are equity based financial instruments. However, one has to understand that only wealth managers & hedge fund managers who operate MF’s know the combination of investment in various stocks, not the common people who own the shares. This is a major shortcoming of investment banking in general where the owner of shares is unaware of his own investment’s utilization. Crowdfunding may bring about a change in these practices by being absolutely transparent about the goal of increasing the return on investments all the while fulfilling primary objective of having well informed & dedicated long term investors. Financial planning is an application of two basic financial concepts - time value of money and profit maximization objective working together. I believe Paytm’s business model is a prime example of financial planning at its best. For those wondering how paytm is holding the top spot in financial planning, they need to understand the in-depth workings of resource reallocation principle. I suspect Paytm has a huge operational budget, however, at any point in time, a fixed portion of the total budget is always invested in call money markets which utilizes the concept of time value and profit maximization to it’s fullest. But what can crowd funding take from this situation. Crowdfunded projects have come a long way, in terms of planning and execution, however, there is still much to do when it comes to refining a successful business model, case in point the Veronica Mars case discussed earlier. The subscription model of the movie ranged from $ 10 to $ 10,000 investments with very exciting incentives (dividends) for all investors/consumers. This looked like a meticulous plan every step of the way until its execution, cause that is when the cracks became more visible. Even though the funds were plenty, the production unit didn’t properly utilize them for the movie, nor were they used in making sure that dividend payout to the investors in kind was satisfactory, resulting in bad publicity for the franchise through negative feedback received from said investors. This only opens up a new crack on the crowdfunding project-wall. Just like many startups, crowdfunded projects generally are not business oriented & a lack of long term planning results in stagnation and the ultimate demise of the project. This can be summed up from the fact that going by its own statistics, Kickstarter has had only 38 % success rate in funding projects to fruition. I can go on about the ineffectiveness of crowdfunding but the fact of the matter is that I can see the glass half full. I truly believe that crowdfunding is an expression of consumerism’s rise to the top of the Demand – Supply food chain. It proves that consumer is literally the king who pays for building the stage, and also enjoys the plays performed on the stage.