The Power and the Peril of Our Crowdfunded Future

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Kiva co-founder Jessica Jackley on the rise of "Kickstarters for XYZ"

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Since Kickstarter launched in April of 2009, we, the crowd, have funded a quarter of a billion dollars worth of art projects, small businesses, tech gear, etc. Some of these, like the Brydge, a beautiful iPad accessory, and gTar, a guitar-iPhone hybrid that recalls Guitar Hero, have raised hundreds of thousands of dollars. Others, like the Pebble, an iPhone-integrated wristwatch, have raised millions. The average project walks away with approximately $5000, and just under half of the projects on Kickstarter meet their fundraising goals and get the money. The company has ignited a movement in technology to create copycat crowdfunding platforms that will fund a huge range of ideas.

EiRbug.jpgThe Jumpstart Our Businesses (JOBS) Act, which President Obama signed into law in April, will ease regulations on securities in the United States, enabling small businesses to raise funding from non-traditional sources. This legislation, along with Kickstarter and others' accelerating growth, has opened the crowdfunding floodgates. According to a recent report, more than 400 crowdfunding platforms were operating at the beginning of 2012, and several hundreds more are expected to seek accreditation by the end of the year. Nearly $1.5 billion was raised via crowdfunding platforms last year alone.

It seems there will soon be platforms to raise money for almost anything, from the local bakery you hope to start in your neighborhood, to your high-technology startup idea, to donations for a church mission trip. What will such an economy look like? To answer that question, I spoke with with my colleague Jessica Jackley, who co-founded Kiva, a microcredit site that has enabled more than $325 million in loans from over 700,000 people since it launched in 2005. She also served as CEO and co-founder of ProFounder, a tool that provided a platform for small businesses to crowdsource investment from their community. She is also an investment partner with Collaborative Fund.*

Can there be a Kickstarter for everything? Why do we need banks for anything, if we can create systems to crowdsource loans? (Or investment banks, if we can crowdsource investments, or foundations and government grants if we can crowdsource donations?)

Jackley: Not all things can or should be crowdfunded. Crowdfunding is a great fit for certain types of endeavors, projects, businesses, or anything else -- and there is a bias (from funders/backers) toward ones that have certain qualities. ... The ventures that keep things light and fun, easy to understand, that have a compelling story, a sexy retail product, will have an easier time getting people to rally around them and contribute. A start-up doing something that's difficult to communicate or doesn't offer any kind of retail product will have a tougher go at it. I'm not saying this is always a good thing -- sometimes, these qualities (fun, retail, sexy product) have little correlation with what will make a business succeed in the long run. The most relevant information isn't always highlighted, or if it is, it isn't always what people pay attention to. The same concept goes for grant-based platforms and the social sector; anyone who's worked in fundraising for a 501c3 know that it's exceedingly difficult to fundraise to cover certain costs. It's not sexy to fund overhead, for example. It's not as fun to pay rent for a nonprofit's office space. So we have to remember that there are worthwhile causes and worthwhile businesses that won't appeal to the crowd.

This seems to line up with your Kiva philosophy: crowdfunding as a way of validating, or manifesting, an emotional connection to an individual or a narrative. It certainly makes sense when the return is largely non-monetary, so for hyperlocal or non-profit funding channels. But what if the money was really good? If there were a platform for crowdfunding, say, boring infrastructure cashflow deals, I would invest in a thousand of them if I thought the portfolio would perform better than other indexes. Wouldn't I?

Jackley: You should! Maybe I will too! There are so many different kinds of motivation for investing or giving or parting with your money in whatever other way, and plain old financial return is obviously attractive. But people are not always rational and are not just looking for that. Investors in big and in small deals tend to invest in people and in stories that resonate with them. On Kiva, hundreds of thousands of people have given up financial return to lend $25 interest-free in exchange for the feeling of participation in someone else's story, of empowering an entrepreneur. They are buying an experience, a role. They're willing to make 0 percent interest to get a feeling of participation and support someone they connect with and believe in. Many of those who contribute for social returns more than financial returns might also want to invest some of their money in other ways, for financial return, maybe even in boring infrastructure cashflow deals.

I wonder how crowdfunding affects other industries. Kickstarter provided more than $150 million in funding to the arts in 2012, outpacing the National Endowment for the Arts (NEA), but is that a lot of money? Does that statistic represent any actual change in the arts? How? And how, then, does that apply to education or the sciences, to healthcare?

Jackley: One of the smartest things Kickstarter has done, in my opinion, is give people a great shopping experience related to the arts, that funds the arts. In essence, they've gotten people to pay $200 for a t-shirt plus the feeling of participation in another artist's endeavor. Artists happen to make pretty great t-shirts (and other creative products or experiences related to their art). I'm not sure healthcare professionals or scientists would as frequently have the skills or the inclination to create awesome t-shirts. I mean, of course they could, but artists spend their lives making art. Art is fun to buy. Healthcare professionals don't make art (in any traditional sense). They care about different goals. They are not focused on making beautiful products or experiences for others to admire and maybe eventually buy.

But even within the arts there are different funding goals. One response I've heard from NEA is that there is a difference between short-term campaign-style funding, and the endowed infrastructure building that traditional grantmakers focus on. Endowing important projects requires sustained interest over time, and the Internet trends heavily towards short term thinking. I'm skeptical that crowdfunding could sustain longer-term projects, like more ambitious entrepreneurial endeavors. Most start-ups that succeed only do so after years, and most start-ups fail. I wonder if the crowd has sufficient attention span for that type of investment.

Jackley: I wonder about that too. But, to suggest an optimistic view, because the process and path of entrepreneurship will be more visible and transparent to more people, there's an opportunity to create real long-term customers, fans, and ambassadors. And individuals who never thought about creating something on their own may now be inspired and feel empowered to do so, because they see someone else like them doing it. Everyone, entrepreneurs and investors alike, will be exposed to the reality of entrepreneurship through the stories we see unfolding online. I hope that the very tough process of starting a company will not be as romanticized or over-glorified to aspiring entrepreneurs. It'll be a reality check, a good thing. Investors too, especially first-time investors, will see more of the good, the bad, and the ugly, and those really tough decisions and inflection points will be exposed to the crowd. Pivots will be much more visible to more people, if entrepreneurs keep their crowd of investors engaged. I hope that the acceptance of failure that is so crucial to entrepreneurship in the US will be made even stronger and more resilient, because we'll all be exposed to more of what's happening with at least the crowdfunding-focused segment of this country's start-ups and small businesses.

Interesting. But is the wisdom of the crowds really good? The Internet seems to rely on it a lot as a product feature, but age-old systems and thinkers have questioned the mob. Is opening access to creative capital and entrepreneurship to the masses even a good idea? Aristotle didn't believe in democracy; he probably wouldn't believe in crowdfunding either.

Jackley: Sometimes the wisdom of the crowd is good. Depends what you're asking them to do (... not ongoing types of feedback or involvement, just a few clicks usually) and depends on which crowd you're talking to. Access to full information is key, but we also should be realistic about who will spend the time to access it at all, even if it's in plain sight. I see no problem with opening up more ways for entrepreneurs get capital -- in general I think the more the merrier on this front -- but again, we need to respect the place of crowdfunding in a very big market, and not try to make it more than it should be.

Right. And actually, to your earlier point, social media is already demonstrating what the wisdom of the crowds looks like. Companies are maintaining active and highly personal presences on Twitter and Facebook to respond to the fact that the crowd is watching and commenting on their every move. Transparency is inevitable, and every one of us who tweets a complaint about an airline or converses with a major clothing brand is pushing it forward. In that way, crowdfunding is a natural extension of this trend. But I do still think that if crowdfunding will extend to other industries, and longer-term funding opportunities, needs to address the notion of ownership, or financial return, more intentionally than it does.

Jackley: Agreed.



*Disclosure: Collaborative Fund is a Kickstarter investor and huge fan.

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Kanyi Maqubela serves as entrepreneur-in-residence at Collaborative Fund. He was previously a founding employee at Doostang and field director at One Block Off the Grid. He is from Johannesburg, South Africa.

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