The Marketplace for Fans & the Superfans that Power Crowdfunding

What happens when we think about Kickstarter and IndieGoGo as fan communities rather than just marketplaces? Funders and founders still congregate in an exchange of money for projects, but a simple qualification introduces us to the superfans who make crowdfunding unique and may stitch the whole thing together.

Crowdfunding sells the fan experience. Find a founder. Tap into their project. Pay into their vision. Interact. Follow their progress. Spread their story. But it’s a speculative fan experience. Each project could generate fans, but they don’t necessarily begin with fans. When you invest in something, you become a fan. If enough invest, it shows you were right.

Speculative fans are fans of crowdfunding, first, and the project’s mission, second. Some of these fans rise to the level of superfans. They derive their superlative not from their expertise or project-specific enthusiasm, but the number and extent to which they back projects. It’s not the fan; it’s the size of their portfolio. They’re the superfans of the creative process. They fund and follow creativity, and they’re unique to the crowdfunding world.

Does crowdfunding work because of these superfans? What would happen of you took the model to a community based around an existing passion and expertise?

Most fan experiences are organized around an established practice or institution that already has fans. Football fans pursue live games, ESPN, NFL.com, Deadspin. Gadget fans end up on engadget. Comic book fans go to Comic-Con. These forums congregate and engage those with an existing passion.

The Twilight series sparked online forums, unbated enthusiasm, and the creative efforts of many. Some have gone so far as to write full-blown fan-fiction for the similarly obsessed, and one notable example made the leap to become a publishing phenomenon of its own: EL James’ Fifty Shades of Grey.

But Kickstarter and IndieGoGo differ. They’re speculative. The founders are generally obscure. The portals draw projects that may not otherwise be funded. They’re organized around delivering a story to facilitate financing, and it’s the financing itself that validates the fandom. These don’t start with an existing passion. They start with a potential passion, and they market it.

No one expected the success Amanda Palmer would have on Kickstarter  The former member of the Dresden Dolls had worked with Ben Folds to produce an album, and it was a failure. She found it easier to sell t-shirts to her twitter-followers than make money from record sales. But Palmer raised almost $1.2 million dollars to produce and tour a new album from more than twenty-four thousand funders on Kickstarter.

Sticknfind started with a perhaps aggressive $70k goal on IndieGoGo. The Bluetooth sensor-set for finding your lost keys closed its fundraising with almost one million dollars in funding for the as yet commercially unavailable devices and app. 

Kickstarter frames the experience as a way to fund and follow creativity. But there’s something more primitive at work. It’s a contest. These projects passed a threshold on Kickstarter and IndieGoGo. They passed the threshold to validity and answered the question, were these projects fan-worthy? Yes, indeed, Detroit needs a sculpture of RoboCop.

A unique clique of individuals has emerged in the crowdfunding ecosystem — the super-backers that Jeremy Schwartz’s Backerbase is targeting. They regularly fund campaigns. Some have gone so far as to fund hundreds of them. They’re real people, and they’re not just employees of Kickstarter or IndieGoGo. Look at their profiles. They have funded everything from video games to hot-sauce to trail-maps. Kickstarter, IndieGoGo, and the rewards-based crowdfunding portals are uniquely suited to help these individuals browse and fund creativity.

Super-backers are among the phenomena that make crowdfunding sites unique. They’re a response to the contest. They’re hooked on the contest. Unlike a traditional fan site that congregates a passionate community through information, conversation, or a creative response to the focus of their passion, super-backers speculate. They pick and choose and flock to projects, so when the casual backer arrives, they can see they’re not alone. They’re perhaps the leaders whose presence tips casual visitors from browsers to funders.

If super-backers are critical and unique to crowdfunding portals, why are they treated no differently than any other user? Their portfolios of funded-projects would benefit from tools to better manage their relationships with founders and track their progress. What would happen if someone optimized the experience for them? Would they be drawn away from the current platforms? Would their unabated demand begin to draw projects away from the current platforms?


Crowdfunding, Adverse Selection, and the Information Problem

Crowdfunding promises to redraw the geography of financing and shift its center from institutions toward individuals. The megabanks and institutional investors aren’t going away; they’re just going to have company. The role of individual investors will expand through crowdfunding platforms that promise to match pent up demand with private investment opportunities.

The JOBS Act will do more than connect doctors in Ohio with businesses in Arizona. Crowdfunding platforms hope to tap more than just doctors and lawyers. Lifting the accredited investor limitation may extend their membership to plumbers and secretaries. And hundreds of crowdfunding platforms have announced their intention to match the retirement accounts of middle-American secretaries with the next hot internet start-up.

Crowdfunding platforms would have one believe that the only missing piece of the equation is the rules. When they’re finally written in 2013, each can finalize the technical details of their platform, and investor money will flow like a river through opportunities all over America and the world. But they’re wrong.

Markets are about much more than enabling transactions. They’re about the information and incentives that precipitate transactions. Crowdfunding markets are no different, but because of how they’ve been organized, they have two significant structural problems.

First, adverse selection. Each listing of an investment opportunity begs the question - why do I get to see that? Is it because all the sophisticated investors passed? What’s the incentive to bring qualified opportunities to the platform?

Second, information asymmetry. Once a deal is listed, will the investors have enough information to perform suitable due-diligence? The company may be uncomfortable disseminating confidential operating metrics and materials to potentially unlimited numbers of people. Smaller investments, such as those sourced through crowdfunding, warrant smaller research and due-diligence budgets. Can an investor afford to pay $10k toward due diligence when they are investing only $10k? Funders are likely to be be at a gross information disadvantage.

While crowdfunding platforms are focused on the technical details, such as escrow, deal-listings, accounts and rule-making, little attention has been paid incentives and information -  the core structural problems of the market. The rules of the game are important, but participants must also have the conditions to play. The real conditions for equity crowdfunding’s success are based on solving for adverse selection and information asymmetry, and it can be accomplished with a lead investor model.


The lead investor model starts with an investor, not the company. It would not allow just any company to list an investment opportunity. It would also not play a role in identifying target companies and promoting them on the platform under the guise of curation. Instead, it would ask existing, sophisticated investors to list deals to which they have committed, so market-participants could coinvest.

Let’s say NewCo is raising $1m in financing. Typically, they will prepare materials and begin to approach investors. At that point, it’s too early to begin crowdfunding. Instead, NewCo will work through an iterative process of pitching and refining, pursuing and ultimately learning from investors. When the company finds an investor who is willing to lead, then it’s time to begin crowdfunding.

The lead investor will list the financing opportunity on the platform. The lead investor will list the opportunity because the lead investor is the one who has done the due diligence. They’re the one who’s already investing. By having the lead investor list, rather than the company, it signals to the crowd that it’s not just any other deal. It’s been qualified by the due diligence and capital commitment of the lead investor.

Having a lead investor remedies the structural information and incentive problems of the crowdfunding market. Rather than being in the dark on due diligence, coinvestors can consider the lead investor’s due diligence on the strength of their reputation. The lead investor’s check-size will warrant more resources for research and give them more access to management and documents. Rather than adverse selection, it’s positive selection. Lead investors contribute deals in which they’re investing, and the market-participants —the crowd— can coinvest.

Why, however, would a lead investor want to share a deal with other market-participants? They’ve invested time and money in deal-sourcing, due-diligence and negotiations to warrant and enable their investment. These efforts have distinct economic value and are exactly what will attract market-participants to coinvest with the lead.

The lead investor has two reasons to distribute an investment opportunity through the platform. First, it will enhance their reputation and enable them to put more capital to work in an effort to support the success of their investment. Second, if they are putting outside capital to work on the strength of their ability to source, qualify and negotiate a financing, then they should be paid for it. The platform will attract lead investors because it will enhance their reputation and provide a performance-based fee for their efforts similar to carried interest.


Crowdfunding will change the financing landscape. Even if its boundaries end with accredited investors, crowdfunding fundamentally changes the geography of investing by directing the capital of investors in one part of America to businesses in any other part of America. But it is not a matter of just setting up a platform.

Crowdfunding needs to sort through the fundamental problems of incentives and information. It needs to solve for adverse selection and information asymmetry. Adopting the principles of a lead investor model will help crowdfunding platforms navigate and avoid these problems. And, in principle, the same may be said for rewards-oriented crowdfunding sites.


Accountability in Crowdfunding - Transparency and Judgement

For all its breakthroughs, crowdfunding has realized a slow accumulation of hard truths. Things don’t always go so well. Production gets delayed. The project founders may not be prepared to handle a boisterous and demanding crowd. And then come the cries of fraud and failure.

The excitement over seeing creative projects close millions of dollars of funding through Kickstarter and IndieGoGo has given way to the challenge of bringing those ideas to market and introduced the problem of, at times fumbling, execution. NPR raised the stakes and framed the challenge in terms of refunds and liabilities. If funders give money, are the creators legally liable? Do they need to provide refunds?

To their credit, Kickstarter responded with a blog post - yes. Accountability is paramount to the funding process, but it’s a qualified yes. Though founders are legally obligated to provide refunds for any benefits promised and unfulfilled, “We hope that backers will consider using this provision only in cases where they feel that a creator has not made a good faith effort to complete the project and fulfill.”

Accountability is important, but it’s accountability to a good-faith effort. No one wants to miss their production deadline, but it happens. To assess whether they were operating in good faith, founders need a communications channel with which to set expectations, and the market must exercise good judgement to assess failure or success. These two elements, crucially, are missing on the crowdfunding platforms.

Founders don’t have the best communication channel to their funders. They’re limited to the project page, a comments section, and general email updates. None of these are particularly well suited to sketching out a timeline of tasks, dependencies and deliverables for their project. Indeed, the comments format is comically unsuitable, leaving a trail of missed connections and missing context. The still-open Auris bluetooth adapter for the Bose Sound Dock project comments are awash with unanswered compatibility questions and even a question regarding intellectual property and the underlying legality of the project.

Unresponsiveness aside, the comments page could use an update. Rather than a continuous stream of messages, the comments page should provide a snapshot of the project’s current status and also tell the story of the project’s history. The experience could be taken still further and also provide a forum for founders to marshall the expertise of their funders for the success of the project. These kinds of changes could improve the satisfaction of the funders and success-rate of projects, while also providing the transparency to establish whether the founders were operating in good faith. Possible paths to take include the following.

  • Timeline - The comments page should include a timeline that details the project history and plan. The key features of the project history are milestones and founder-updates. The milestones for design projects, for example, could begin with the Kickstarter launch, followed by the successful funding, and then a series of concrete production goals, such as the steps that take the project from prototype to production. The presentation founder-updates should illustrate a regular communication with their funders on these goals.
  • Founder-Thread - Founder updates and messages are important. Why not list them on their own, rather than mixed in amongst the, at times, many other comments? Pebble has more than one hundred and seventy pages of comments. Give the funder a view that shows the founder’s comments. If anything stands out, they can zoom to that point in the conversation.
  • FAQs - The Hex Bright programmable flashlight has more than forty-four pages of comments. Shouldn’t salient questions receive their own thread? Couldn’t funders and founders tag questions and answers around specific issues?
  • Experts - Each fundraise not only collects money, it collects people. Those people have expertise and experience that could be invaluable in the development of the project. Let founders put a call out for expertise. Give funders a chance to contribute their expertise.

Craigslist succumbs to the tendency of most monopolies. It's good enough.


What Matters in Crowdfunding

Dalton Caldwell sparked a debate about what Twitter could have been the other week. Like a disappointed uncle, he waxed on about the two paths Twitter could have taken, and how saddened he felt by their decision to become a media property, organized around advertising. But that wasn’t the only debate he triggered.

In Caldwell’s view, Twitter could have become a paid service that underpins the real-time messaging infrastructure of the internet. He felt so passionately about this that he started a kickstarter-esque campaign to marshall the support of the community to crowd-fund the project, so his company, app.net, can develop it.

While many pixels have been spilled debating the merits of his proposal, it doesn’t just raise questions about Twitter. It also raises questions about crowdfunding. His kickstarter-esque campaign is not on Kickstarter. It doesn’t fit their terms of service. Nor is it on any other crowdfunding platform. Caldwell and his team built their own platform specifically for the project. In doing so, he implicitly asked the question: what does a crowdfunding platform contribute to crowdfunding? 

Caldwell generously says, he wishes he could be on Kickstarter, and it would “have a higher % chance of success if we were.” Quickly, he volunteered five reasons he would like to use a crowdfunding platform like Kickstarter.

  1. It’s trusted
  2. The UI is well known and understood
  3. They have marketing efforts via web & email
  4. Their code is all very good and tested. We had to write all of this from scratch
  5. A rabid fanbase

The project has raised over $110k and has fourteen days left to reach the $500k threshold. Will it succeed? If it fails, would it have been more successful if it had been on Kickstarter and joined the 46% of projects in 2011 or, as of writing this, the 44% of projects that succeed as of today on Kickstarter?

Unfortunately, we’ll never know. We can’t compare the counter-factual.

But we do know a few things. He’s raised money, so he appears to be trusted. The UI didn’t pose any problems with being understood. Hisupdates to funders and the project page appear oriented toward marketing via web & email and reflect ongoing earned media coverage. And the code, though written “from scratch,” is stable.

Twitter has been alive with discussion over Caldwell’s project and its merits. Read Write WebTPMDigiday and the MIT Tech Review have all covered it. And he’s converted just about 1500 supporters so far. He’s acquitted himself well and established viable substitutes for each of the qualities he’d look for in a crowdfunding platform.

Which brings us back to the original question. What does a crowdfunding platform bring to crowdfunding?

Caldwell started with five reasons to use a crowdfunding platform. He developed substitutes for all but one - the rabid fanbase. Perhaps he open-sources the software, but he can’t replicate Kickstarter’s teeming community of fans and funders. We’re fourteen days away from seeing if it matters, or if the fan-base Caldwell brought to and grew through his project is sufficient.


Designing Crowdfunding Markets - Disclosure & Scrutiny

When people think about markets, they think about stocks, trading, indexes, the closing bell. They think about transactions and money trading hands. But markets are as much about money as they are about information. And crowdfunding sites are no different.

Information is essential. Without liquid, reliable information, markets function poorly, if at all.

Investors gave IndieGoGo $15m to make a market in crowdfunding across verticals and geographies. Kickstarter repeatedly gets headlines for this or that project that has broken the $1m mark. The early response to their efforts has been promising, but crowdfunding sites have the same problem as markets — an information problem.

What is that information problem? It’s information asymmetry.

Academics use asymmetric information to describe a situation when one party has an information advantage over another. Markets erode these information advantages through disclosure and scrutiny. Whether it results in the price of a stock or the strengths and weaknesses of a company or a product, the process leads to discovery. You could even say, information asymmetries drive markets.

Most discussion around asymmetric information revolves around disclosure. It centers on insider trading or false reporting. When an investor illegally trades on inside information, they’re exploiting asymmetric information. Similarly, when a company obscures or ignores material risks to their business or outright lies about their performance, they’re exploiting an information asymmetry between themselves and their investors.

Congress created the SEC to mitigate asymmetric information through accurate and consistent disclosure by public companies. It was a simple premise - public companies should tell the truth about their businesses, their securities, and the risks involved in investing. SEC-mandated disclosures made it possible to piece together public companies finances and also helped mend investor confidence following the crash of 1929. Information brought investors back to the market, broadened participation, and deepened our capital markets. And lack of disclosure, among other problems, for example, severely hampers markets for private companies, such as Liquidnet, Second Market and Sharespost.

Crowdfunding sites face a similar problem. Contributors must rely on the principals behind the project to provide an accurate representation of their backgrounds, their  objectives, and their ability to execute. Contributors find themselves faced with asymmetric information, and sometimes things don’t go so well. Some might say the ZionEyez project and its tumultuous comments section is a case in point, but it gets worse. A more pernicious example is Mythic. The project was recently exposed and taken down on the grounds that it was an outright fraud.

Disclosure provides an even playing field, but it only solves part of the problem. The crowdfunding certification program from Crowdsourcing.org has begun to standardize disclosure, but crowdfunding also needs scrutiny. Investors, for example, work very hard to expose information asymmetries through analytic methods and diligent research. It’s an important part of the investment process, and it’s exactly this scrutiny that’s missing in the crowdfunding industry.

The investment world provides a direct incentive for scrutiny. Get the story right, and you could make a fortune or make someone a fortune. The financial markets abound with these examples: MF Global, Enron, Green Mountain Coffee.

Perhaps equally important, however, scrutiny will also illustrate the winners. Good research and analysis supported Google when it went public and told the story about the turnaround at Starbucks. Crowdfunding needs all the scrutiny not just to flush out the bad projects, but to highlight the good ones.

Markets are as much about money as they are about information. Most people get hung up on the money part without considering the information problem through scrutiny and disclosure. Crowdfunding is no different. But it does carry a unique challenge. How can the market cultivate the scrutiny not only to expose frauds and losers such as Mythic and ZionEyez, but showcase the winners?


instrumenting the web, instrumenting people

We would love to have better access to data that’s out there. We find it frustrating that we don’t.
Larry Page, via Bloomberg

Let’s just unpack that statement for a minute. Larry Page, CEO of Google, sees a meaningful void in the data it collects, and the void frustrates Google’s mission to organize the world’s information.

But there have always been data-sets that are off-limits. Google doesn’t process commercial data such as I/B/E/S from Thomson, FICO scores or D&B numbers. It doesn’t have access to telephone records or transaction histories through payment networks, such as Visa and Mastercard. So why now?

It’s because the web is slowly closing off, and it’s indicative of a sea-change in how people find content on the web.

Through most of its existence, Google has relied on the open web to expand, so it can collect new information, new users, and new levels of engagement. Everyday, it harvested the needs, desires and questions of an increasingly connected global community through its search box and matched these to results taken from its ever-expanding index of content. Google instrumented the web.

The web’s still growing. More users are engaging more services, day by day. But it’s happening in social networks and through mobile apps: it’s happening outside of the open web, beyond the reach of the Google crawlers. The robots.txt-gambit has finally been countered.

Robots.txt is the text-file that sits on web-servers and tells Google and other search engines to include or exclude it from the database. In a web mediated by search, it’s inconceivable that any site in need of traffic would opt out of the Google index. And with a knowing wink, the search industry has always said, “if you don’t want to be indexed, just let us know with Robots.txt.” They said it to the news industry as Google News hoovered up article after article, splayed them out in all their equivalence, and cemented the concept of news as a commodity.

What’s different today? Instagram took the bait, built a thriving community of more than 30 million users, and none of their photos make it into a Google search. Facebook, Twitter - they built terrific size and engagement, but they didn’t do it by making it easier to be found in a Google search. Rather than build a business out of arbitraging the commercial value of paid search terms, like Demand Media, they changed the way people found things on the web.

While Google invested billions in instrumenting the vast documents and contents of the web, Twitter, Facebook, Instagram instrumented people through tweets, status updates, and photos. And its this web of people that sits just beyond Google’s reach and frustrates Larry Page.


news - not as social as one would think

Some 32% of readers get their news from Google or some other search engine

It’s a close follower to the 36% that go directly to a news-media-site or app, but it still exceeds the 29% share held by news aggregators or, as the Pew Research Center likes to call them, news organizers.

None of these numbers, however, begin to approximate the influence held by Twitter or Facebook. That’s because Pew found only 9% of digital readers get their news through Facebook or Twitter recommendations. Writes Pew, “social media news consumption is supplemental.”

If Twitter and Facebook are the future of news, it’s not a little of an understatement to say the future is not evenly distributed.


no one wants another facebook - the failure of google+

Google+ is the social network everyone loves to hate. Nick Bilton of the Times brought some equanimity to the discussion and suggested, the most we can assert is that opinions are split. But that won’t help Google build their Facebook-killer, so Bilton aimed to isolate the root-cause of why people feel so ambiguous about it. His answer, design. But that’s not the answer.

Bilton marches an army of possible reasons through his article before narrowing to design. Is it because no one wants another social network? No, there’s Path. Is it because it doesn’t have distribution? No, it’s Google. Everyone’s tried it. Having exhausted the other possibilities, he sees no other failure but design: “the design of Google Plus feels, well, undesigned.” That’s why it’s a failure.

But is that the case? No.

Google+ didn’t fail because of bad design. Google+ failed because they tried to make a slightly better version of Facebook, and no one wants a slightly better version of Facebook.

Path, Instagram, Pinterest — they succeeded because they aren’t Facebook. They didn’t set out to clone Facebook. They set out to find a niche, solve specific problems and make them the centerpiece of their service.

Path provided a more intimate, mobile-only social network alternative to Facebook when Facebook had little reach beyond its website and had begun to feel over-exposed. Instagram introduced retro-filters and reinvented photo-sharing in a mobile setting. Pinterest created a network of things through inspiration boards and the efforts of so many would-be taste-makers who embraced it.

What differentiates Bilton’s counter-examples isn’t design, it’s that they didn’t set out to replicate Facebook. Google did, and that’s the problem.


pinterest, righthaven, and the surprising varieties of fair use

Is Pinterest the napster of images? Tech circles have bruised themselves wrestling with this question since a sometime photographer and attorney raised it late last month.

Kirsten Kowalski, who asked the question and also asked not to be quoted, in whole or in part, made a—to paraphrase—lachrymose parting with her Pinterest inspiration boards. She shared a thoughtful and earnest elaboration of her reasons on the basis of potentially rampant copyright violations on Pinterest.

Kowalski’s revelation begins with fair use. Fair use provides limitations on the exclusive rights of copyright. If copyright presents the holder of a state-sponsored monopoly on an expression fixed in a medium, it also says, wait a minute - sometimes we should share. But the law has never been absolutely clear on the boundary between fair use and infringement. Because the penalties on infringement are so great, Kowalski concludes, better safe than sorry and an internet sensation is born.

Fair use, however, isn’t always straightforward. Take the case of Righthaven. Drawing from the example of so-called patent trolls, Righthaven was established in 2010 to identify and monetize copyright violations across blogs and websites. Righthaven was Kowalski’s nightmare. She was afraid someone might sue her for copying an image to Pinterest, tie her up in litigation, and extract potentially sizable damages. She was afraid of a Righthaven.

Righthaven succeeded in some ways. Stephens Media of Las Vegas, operator of the Las Vegas Review-Journal and anchor client of Righthaven, transferred portfolios of copyrights associated with infringements. Righthaven launched an aggressive and litigious campaign to collect royalties and damages for Stephens and other clients on the basis of snippets and outright copying of these materials. Because the penalties can be so high for each infringement - $150,000 per violation - they settled many cases and appeared to be on a winning streak. But it did not end well - not for Righthaven.

On Tuesday, March 13th, U.S. District Judge Philip M. Pro relieved Righthaven of its trove of copyrights it had been assigned, as well as its own web domain, to settle debts of more than $200k to defendants who chose to fight Righthaven’s advances. Not only did Righthaven fail, it failed so dramatically that Judge Pro’s decision to auction the assets stemmed from a failed attempt to extract damages from an individual who posted the entirety of a Review-Journal editorial to an online message board - as seemingly clear cut an infringement as one would expect. Nonetheless, Judge Pro labeled it fair use. Wayne Hoehn had posted it toprovoke a broader discussion around the finances of the nation at large.

Are the photographs and images shared on Pinterest covered by fair use? It’s hard to say, and at the extreme, Kowalski is correct, but fair use isn’t always about extremes. Righthaven had poor Hoehn seemingly dead to rights, but the stalking horse for Kowalski’s nightmare collapsed into a shamed and indebted failure. Such is the supple and sometimes unexpected way of fair use.

So rather than hyperventilate and quiver in fear over the napsterization of images on Pinterest, it may be better to breath a minute and recognize that the real question isn’t even whether it is fair use. We should assume it probably is, so we can get to the real question — how can Pinterest provide all those artists and photographers a greater economic stake in the game? How can Pinterest help them build their reputation, influence and business? How can they make them their allies?