Crowdfunding: Turning Transactions into Relationships?

Whether you’ve watched campaigns from the sidelines, backed a couple cool projects or launched something yourself, there is something undeniably special about crowdfunding. No other commerce model is underscored by the sense of community and humanity that has propelled crowdfunding forward. I mean, how else could a guy named “Zack Danger Brown” generate $55K in potato salad pre-sales? Or in what other way could the prototype for a revamped cooler generate $13M+ in pre-orders, collecting more than 62,000 backers along the way?

The fact of the matter is that as much as crowdfunding is changing the way innovators sell, it’s also introducing a new way of buying. The buyer-seller relationship of major online commerce that has always preached standardization, centrality, and two-day shipping is being tested. As crowdfunding continues to grow, adding an estimated 270,000 jobs and $65 billion into the global economy this year alone, the shift in consumer behaviour will become much more visible.

Is crowdfunding spawning a “new normal” where transactions become personal and buyers become collective members of a product’s community?

E-Commerce is Getting Personal

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As crowdfunding becomes mainstream, the trend towards more personal and emotional buying experiences is gaining visibility. Beyond platforms like Kickstarter and Indiegogo, or applications like Celery that allow anyone to crowdfund on their own website, marketplaces like Etsy also promote a more personalized type of peer-to-peer e-commerce. This works in opposition to e-commerce giant, Amazon, where a well-oiled assembly line mass produces and delivers goods to customers in the shortest timeframe possible. Although the inventory-rich Amazon brought in a record-high $89 billion in net revenue last year--growing an average of $13.6 billion annually since 2011--new anti-inventory players that sell ideas and the people creating them, are gaining impact.

With hundreds of thousands of items eligible for next day shipping on Amazon and other online marketplaces, one could rightfully wonder why more and more buyers are backing crowdfunding projects that may not be shipped for months, or perhaps ever. In a study by Wharton professor, Ethan Mollick, he measured successful Kickstarter projects in the categories of Design and Technology that promised delivery before June 2012. He found that 2.9% of projects failed to deliver, and did not issue refunds to their empty-handed backers. He also found that of the 247 projects that actually delivered goods, only 24.9% of projects delivered on time, and 33% had yet to deliver by the time the study concluded.

To put it simply, Mollick’s findings reveal that project delivery is less than seamless. Majority of crowdfunded deliverables were delayed, and some would never be delivered at all. Despite these findings--which are echoed throughout countless forums, articles and crowdfunding studies--backers continue to faithfully back without security or guarantee. This faithful (sometimes even irrational) financial support for products or ideas that have yet to materialize, suggests crowdfunding is driven by emotional influence.

To illustrate, can you imagine buying something on Amazon or Ebay under the agreement that your purchase won’t arrive for several months, will likely arrive later than estimated, and may not get to you at all?

Within the framework of a standard transaction, these stipulations are unfathomable. However, when it comes to crowdfunding, delays and uncertainty are the accepted norm. This indicates that backers are not the same as buyers, and that a different set of rules apply--a set of rules that more closely resemble an investor-investee relationship.

Backers Aren’t Buying, They’re Investing.

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In 2012, Kickstarter founders, Yancey Strickler, Perry Chen, and Charles Adler published their infamous “Kickstarter is Not a Store” blog. The blog introduced new guidelines and restrictions to the platform in order to “reinforce that Kickstarter isn't a traditional retail experience.” What Kickstarter was trying to reinstate is that crowdfunding is an entirely different value exchange than a typical transaction; backers are not the same as buyers. Rather, backing a project is more like micro angel investing--the risk is real, and the reward for being an early-adopter is measurable.

The investor-investee relationship between backers and creators is echoed in rewards-based crowdfunding where backers are rewarded with an exclusive, early version of the product that is often heavily discounted. Like any investment, the risk that the project will not materialize and the timeline will waver should be understood. In this sense, crowdfunding backers offer a level of support and flexibility that challenges the typical transaction formula, and more closely resembles venture capital funding.

As Ethan Mollick concluded in his crowdfunding research, “crowdfunding represents a potentially disruptive change in the way that new ventures are funded.” Equity crowdfunding well illustrates this disruption, in that backers are rewarded with company shares for their investment. For example, Toronto-based chef, Gil Michel-Garcia, crowdfunded more than $200,000 for his company, Wafu. Instead of rewarding backers with his product (Japanese-style salad dressings), he offered up stakes in his business, asking “why can’t I deepen my relationship with my customers by making them my shareholders?” He added, “there’s no better shareholder than someone who’s a fan of my company.”

Rewards-based crowdfunding and equity crowdfunding allow for the larger collective to support a new venture. The collective crowd is altering the way new ventures are funded, and has the potential to diversify and decentralize conventional investor influence and control. When a backer is an investor, they are linked to the project not as a typical consumer, but as someone who has inside-knowledge, who influences how the project materializes, and who is investing in the idea and its creator.

Crowdfunding Creates Community

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In a Northwestern study that looked specifically at the role of community in crowdfunding, researchers found that, “by regularly interacting with an online audience through marketing efforts, participating in discussions, sending updates, and inquiring for supportive efforts, creators build an ad hoc community of supporters.” These communities are brought together by common interest and to reach their shared goal: funding someone else's project. After personally funding, backers often appeal to their own networks to extend their support--something common in community-wide initiatives, but less likely when individually-motivated.

Through qualitative research, the same Northwestern study also found that self-sustaining ecosystems were being built where creators are backers, and backers eventually become creators. After conducting 47 interviews, the team found that “project creators feel a sense of responsibility for giving back to the community that supported them, whether that is financially or as a mentor.” In other words, creators believe in reciprocation by supporting other projects through mentorship, sharing valuable learnings, leveraging their own networks, and of course, by funding. This suggests that the crowdfunding community is open and collaborative, rather than closed and competitive.

The shift toward transactions becoming personal is an emerging “new normal”. This March, Amazon launched a new storefront called Amazon Exclusives, to sell innovative hardware gadgets made by early-stage brands, as well as collections by small businesses. The storefront even features campaign-style crowdfunding videos to share the entrepreneurial story behind the product. This recent launch by Amazon is responding to the emerging idea that “customer-centric” e-commerce also means greater transparency, relatability, and engagement.

Each year, as billions more dollars are funded through the collective efforts of the “crowd”, there becomes greater counteraction to the standards of buying. Although it’s impossible to predict how crowdfunding will permanently alter the e-commerce transaction rulebook, we do know that buyers and backers are already behaving differently. Backers engage in month-long relationships with project creators, invest in innovation, and form communities--online buyers do not.

Whether consumer behaviour can be compartmentalized, with different rulebooks written for various e-commerce channels is unlikely. As crowdfunding grows, transactions may take on a slower pace, giving buying a chance to regain its meaning.