Venture capital goes ‘public’?

Elite_Dangerous_artwork

I recently wrote a blog post about crowdfunding (‘Kickstarter capitalism‘). In that post I largely reflected the perceptions of a typical ‘backer’ (or, one might say, ‘investor’) in crowdfunded initiatives – that is, someone like me. I’ve become enthused about how crowdfunding can help bring new creative ideas to life, when otherwise they might never have been funded; I’ve also bascked a number of such ‘projects’.

Once that post was published, I realized that there were still aspects that I wanted to address, particularly relating to the perspectives of crowdfunding from the view of a potential raiser of funds / project ‘creator’. I’ve not yet ‘created’ my own project on Kickstarter, but I have ‘participated’ in the creation of a project with a group (a consortium?!) of other individuals (more on that in a another post at another time!).

In my earlier post on crowdfunding I specifically avoided mentioning one particular project, ‘Elite:Dangerous‘, partly because I’d already covered the topic of ‘Elite’ in another  previous post (‘To be Elite‘), and I also didn’t want that to become the dominant theme of my crowdfunding post. I also didn’t want to make it sounds like the potential ‘risks’ that I highlighted were aimed at Elite:Dangerous or its ‘creator’, Frontier Developments (they were not).

I raise it again in this post however because Elite:Dangerous is in fact a great case study of what crowdfunding is capable of:

  • The project holds a record for being the largest ever successfully funded target (£1,578,316) – some other projects have raised more money but with lower targets, and some other projects had higher targets but were not successfully funded; and
  • Elite:Dangerous also massively demonstrated the potential to canvass interest in a creative venture (something that Frontier Developments stated as an objective from the very beginning of the Elite:Dangerous project).

Testing market interest in an idea before progressing too far in its execution, allows parties to better appraise what the market wants, before spending their capital, and potentially also ‘cut out’ certain intermediaries in the value chain.

During the course of the project (a longer than average project, of just more than 60 days) the ‘comments thread’ on the Elite:Dangerous project page on Kickstarter.com passed 120,000 comments. Only backers could comment, and many of them were passionately engaging with each other, and, importantly, representatives of Frontier Developments, the project creator.

Not only did the large number of comments help demonstrate the enthusiasm for this project (in this case, partly driven out of nostalgia) it also gave Frontier Developments a way to engage with the eventual customers of its product, to better understand their desires, to reflect those desires in the design of the product, and thereby better deliver what customers want. Brilliant, or?

Frontier Developments already had other ways of engaging with their customers – for example, they run a ‘forum’ on their own website, with different ‘threads’, some of which relate to ‘Elite’, and one in particular that discusses ‘specification requests’. One also need look no further than the internet for many other sources of ideas (fan websites, etc.). Nevertheless, the Kickstarter comments thread brought it all to a point, and made it real.

So, back to the title of this post – does crowdfunding allow venture capital to ‘go public’?

Venture capital typically related to funding from ‘angel’ investors (typically wealthy individuals acting on their own) or professionally organized pools of funds, typically attracting wealthy individuals (ie, similar to the ‘angels’) or other organizations looking to invest capital; more specifically, venture capital also typically looked at specific ‘types’ of assets, with a certain risk profile (typically start-ups, early stage / high growth businesses, new ideas / concepts, etc.).

Crowdfunding effectively allows members of the public to participate in similar ‘investments’, typically with ‘small’ contributions (all the way down to €1, and sometimes capped around a €5,000 level per individual, or broadly similar amount in different currencies). But crowdfunding even goes beyond venture capital, by being able to tap more emotional, social, or philanthropic interests (venture capital being largely ‘capitalist’ in its approach). Also, as raised in my previous crowdfunding post differs in one very important way to most venture capital – the project backers tend not to have an equity stake, and therefore also no ‘return’ on their investment (at least generally not one that is based on the projects financial performance).

In preparing this post, I came across an interesting blog post from CrowdMission (launching soon, and aiming to be “the world’s first equity-based crowdfunding platform for socially-driven businesses”) , ‘Kick starting the crowdfunding revolution‘ – I understand that CrowdMission will be one of the first crowdfunding sites that allows ‘equity’, not just ‘rewards (generally the approach of Kickstarter, Indiegogo, Pozible and others), blurring the boundary between venture capital and crowdfunding as it has so far tended to be defined.

Beginning to attract mainstream, and professional attention …

In the past week I’ve come across articles on crowdfunding by  three separate professional advisors, which share interesting perspectives on the future for crowdfunding:

  1. Crowdfunding portals bring in the bucks (Deloitte)
  2. G20 Funding the future – Pre-seed and seed stage (Ernst & Young)
  3. FS [Financial Services] companies test ‘crowdsourcing’ (KPMG)

Conclusion

For now venture capital still exists as a separate category of potential capital raising.

There’s no denying however that crowdfunding is now an established, alternative source of potential funding that deserves attention – it might work for some, and not for others; it’s also not a source of ‘free money’ (individuals can be as demanding as professional investors, and often more irrational – which can be a benefit as well as, or alternatively, a drawback to project creators looking for funding).

I expect that rather than becoming a distinct new category (or categories) of funding, the lines between different types of funding will eventually blur; the market will eventually capitalise on the opportunities wherever they exist, subject to possible regulation (which might even increase, if new funding possibilities, like crowdfunding, continue to attract greater attention).

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One Response

  1. I concur with your analysis!

    Crowdfunding a wonderful example of the democratisation of human ventures in general, and the internet acting as a vehicle for disparately distributed people to share knowledge and work towards common aims.

    Agree also that ultimately, current forms of crowdfunding will become part of a spectrum that goes all the way up to traditional venture capital.

    Live the Elite/Frontier Developments example.

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