The Fortune 500 Crowdfunding Conundrum
Sep 11, 2014 9:07 AM PT
A notification that UC Berkeley this October will host the first executive program dedicated to teaching major corporations how to tap into the US$80 billion crowdfunding marketplace recently kicked off an email exchange between ECT editor Mick Brady and me about issues raised by the program.
Me: Hey, Mick... Coke Dodge and other F500 companies are apparently crowdfunding... and UC Berkeley is running a course on this for them... think this is worth a news piece or a feature? Let me know... this is amazing.
Mick: Thanks -- yeah, this is interesting -- let's whip up a feature on this. This pitch kind of makes it sound like corporations are moving in on the little guy's turf, but why should the crowd's options be limited to cash-poor startups? If the crowd becomes excited by a corporate initiative and wants in on a "reward," how could that hurt anyone else? Could it be that corporate types are using their resources to manipulate and take over the process in some way?
Me: I agree -- we shouldn't limit crowdfunding only to cash-poor startups... if this lets ordinary people buy shares of large companies that would be a good thing, though [I'm] not sure that's the case ... OTOH large companies could be sucking up funds that might otherwise have gone to the cash-strapped... I'll look into this later.
The Good, the Bad and the Pragmatic
"We are seeing established companies turn to Indiegogo to build new communities, engage with customers, test ideas, demonstrate value, and mitigate risk in a way previously not possible," Shannon Swallow, vice president of marketing for Indiegogo, told the E-Commerce Times.
Should a company of that size turn to crowdfunding to raise money? By doing so, are large companies like Marvell drying up a source of funding that otherwise would be available to startups? Is that morally reprehensible?
"Ethics is a personal set of standards and beliefs, and what may be considered an unethical act by some will often be considered as totally acceptable by others," Larry Chiagouris, a professor of marketing at Pace University, told the E-Commerce Times.
"It is distinctly different when companies are using crowdfunding to test the market before releasing a product as opposed to receiving investment capital from the public," Sang H. Lee, CEO and founder of Return on Change, pointed out.
There are two popular types of crowdfunding. Donation- or reward-based funding is basically a feel-good exercise for the investors and is typified by sites such as Kickstarter. Investment-based crowdfunding, offered by companies such as Crowdfunder and CircleUp, aims to give participants a return on their investments.
Many corporations use reward-based crowdfunding as a way to test markets and "pretail" products before proceeding to mass production, Lee told the E-Commerce Times.
Investment-based crowdfunding, on the other hand, originally was intended to "democratize finance and provide small businesses new capital formation opportunities as well as allow the everyday investor to participate in high-growth opportunities which were previously strictly controlled and regulated," he explained.
A New Approach to Marketing
Sales can be driven through crowdfunding campaigns, which indirectly increase brand awareness or shift consumers' perceptions, Richard Swart, director of research on crowdfinance at UC Berkeley and one of the faculty involved in the executive program, told the E-Commerce Times.
"Nothing beats people engaging with a brand through a contribution or purchase," he explained. "Corporations realized that crowdfunding is wildly popular, relatively cheap, and effective at mobilizing communities of people around causes or ideas."
For example, Dodge ran a Dodge Dart registry that let community organizations raise money to purchase a car for a needy person or for a cause, which "significantly increased" sales of that brand following the campaign, Swart said.
Sharing the Wealth
Equity crowdfunding is just another avenue for corporations to raise money, Swart said.
"Whether it's a public company trying to raise awareness and gauge feedback through a campaign or your neighbor who needs funds to start a bakery, anyone can launch a campaign on Indiegogo, and it's ultimately up to the crowd to decide whether or not to fund it," Indiegogo's Swallow explained.
Google, Philips, Honda, Domino's and Warner Bros. all have turned to Indiegogo to raise funds.
Crowdfunding by large corporations "could definitely represent a way for small investors to get in on the ground floor of new and exciting marketing opportunities without the investment bankers taking a piece of the action," suggested Pace University's Chiagouris.
It also might improve trust in the process.
Further, while large corporations may have "much better access to resources" to launch a popular campaign, many small companies "have had great success ... even with limited resources," Return on Change's Lee noted.
A Question of Trust
Trust has been battered in the reward-based crowdfunding sector.
For example, 9,500 people who donated $2.4 million to Oculus VR through Kickstarter got nothing except the chance to vent online when the company's founders sold it to Facebook for $2 billion.
Nearly 14,000 people who coughed up almost $600,000 for the Yogventures game project on Kickstarter did not see a penny of their money when the developers canceled it. They were, however, offered early access Steam keys for the game TUG.
"The Internet has changed the way people connect with one another -- yet the act of investing remains the same," Lee said. "To spur entrepreneurial growth and advance innovation around the world, we believe in the importance of utilizing technology and equity crowdfunding."