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Editor's Note: The following comes to us from Thomas Vass, owner and manager of The Private Capital Market, a fee-based subscription crowdfunding site. Vass explains the need for trust between a company's leaders and its investors, and looks at how webinars can stand in for the traditional face-to-face meeting. For more on The Private Capital Market, check out the company's website.
Generally, technological innovations begin in very small niche markets when a tiny group of risk-taking consumers decide to try out a product or service they have never seen before. It is never clear that the innovation will ever reach a larger market because the forces of the status quo, as a result of the survival of the fittest, are always trying to kill the innovation.
So, most of the success of a technological innovation is a market phenomena, and not a technological or scientific engineering break-through phenomena. This explanation of the innovation on raising capital via crowdfunding is relevant and accurate. A technological innovation in crowdfunding has a very small niche market, but the status and future evolution of crowdfunding is very uncertain.
The greatest economic impacts from technological innovations occur when a technology from one part of a market crosses over, or interbreeds, with a distinctly different market. Some economists have called this type of technological crossover a “radical innovation,” in the sense that it disrupts consumer behavior in multiple markets, as many consumers begin to buy the new product and abandon the older products and older markets.
In radical innovation, both the markets and the technology crossover.
This is true for crowdfunding, where a technological innovation in telecommunications has crossed over into a technological innovation in capital markets, and that crossover now has the force of law in the guise of the JOBS Act.
The more normal type of technological innovation occurs when a single product technology undergoes improvement to make the product more consumer friendly. Some economists have called this a “sustaining” innovation.
When the older products are abandoned, they die. Some economists have called this “product obsolescence.”
Once a radical technological innovation occurs, it is unstoppable and the future path is unpredictable because so many different markets are being affected.
Many participants and observers in the multiple markets generally reach a common conclusion all about the same time. “Hey!” they think to themselves, “we better get on our surf board and surf this big wave or we are going to miss out.”
When they all start to act individually, their behavior has a cumulative, exponential collective effect on the markets. This is called a market bifurcation, and the prior economic conditions, called equilibrium, will never be regained because the old markets do not exist anymore.
This explanation of the internet’s effect on the private capital market is relevant to the new JOBS Act involving crowdfunding. Something in the old private capital market has been made obsolete: the dog and pony show of company CEOs going to angel and venture capital events seeking capital.
The internet and crowdfunding (the two technologies) have bred a new technological innovation called crowdfunding webinars.
Some parts of market behavior never change. Take, for example, the exchange of trust during a capital market transaction. Trust is faith that reciprocity will occur in the future, extended in the absence of any evidence.
Trust, as a moral value in capital market exchanges, generally means that the investor who invests in a company extends faith that the act of repayment will be made by the company in the future. No matter how many lawyers and government agents are involved, the future repayment is an act of trust between the investor and the company, made at the very beginning of the exchange.
In other words, the trust exchange is a precursor condition that happens before the capital investment exchange. Nothing about internet crowdfunding has changed this part of human behavior in private capital market relationships between investors and companies.
One of the most interesting parts about trust and capital markets is that both only extend about 50 miles, in a geographical envelope of trust. In other words, in the old days, before the JOBS Act, most companies would raise capital from investors located within the 50-mile envelope of trust.
The 50 mile envelope for both trust and capital is related to tacit, or in-person, communications before and after a capital market exchange. Before the exchange, the investor needs to “see” the CEO in person to determine the “trustworthiness” of the CEO. After the exchange, the investor needs to be able to easily drive to the company to observe and verify the ongoing trustworthiness of the investment.
In the new way of crowdfunding, trust is still essential. But webinars extend the envelope of trust to a much wider market of potential investors.
In order for trust to be exchanged, the webinar technological platform must replicate the conditions of exchange that investors are accustomed to experiencing in the older model. In the older model, at the dog and pony shows, the investors would coolly sit back in the audience and assess the presentation made by the company CEO, thinking all the while, “Can I trust this guy to reciprocate?”
In the newer method, the investors still look for tacit clues or small voice inflections, to determine if the CEO and other company presenters can be trusted. But, the investors are searching for clues by watching the webinar presenters on a computer video screen.
In order to gain trust in a capital market webinar, the CEO needs a technological platform that conveys the rich full details of tacit communication and knowledge.
The technology supporting the webinar presentation must have a minimum required set of technological features to convey tacit signals to the viewers.
At a minimum, all the features listed need to be standard components of the equity crowdfunding webinar platform, and all the features are directly tied to establishing trust.
The internet has changed everything about private capital market exchanges except the importance of exchanging trust before the investment between investors and the company. One of the interesting characteristics of trust is that once initially established, the bonds of trust extend over time, and over geographic distance.
The bonds of trust are generally only broken as a result of some catastrophic betrayal.
Webinars are a tool to establish the initial bonds of trust between investors and the company before the exchange. They are also essential for continued use in the future, to continue to cement the bonds of trust when future events become unpredictable and uncertain, that easily lead to the suspicion of betrayal.
And, while the initial capital raise may include far-away investors who attend the webinar, it is more likely that the pre-established bonds of trust in a local community will mean that most early stage capital will continued to be raised within 50 miles of the company.
The later rounds, as a result of investors moving around to different locations, will likely have a much wider distribution of investors, who continue to communicate with the company through on-going scheduled webinars.
The webinar features explained in this article supplement a wide range of other internet based technologies that will soon become available for equity crowdfunding, including (if and when the SEC ever acts on new rules), extensive internet public relations and marketing related to the capital project. These marketing functions will be described in my next article.
Vass is the owner and manager of The Private Capital Market, Inc., a fee-based subscription crowdfunding website. Many of the webinar features and functions described in this article are based upon his research and investigation of WebMeetLive, a webinar company located in Oregon.