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Crowdfunding and the ‘Engagement Effect’ Concept
editorial

Crowdfunding and the ‘Engagement Effect’ Concept

Editor's Note: We are introducing examples of the leading industry research and advisory work that our sister organization massolution is engaged in. The piece below is just a sampling of the findings from a recent massolution project performed for its client, the American Institute of Architects (AIA). For more information on massolution and its industry research, go to crowdsourcing.org/research; for services, visit massolution.com.

When experts discuss crowdfunding, they generally reference two benefits: a successful campaign generates significant working capital and provides market exposure, making it more likely to gain mainstream popularity.

Increasingly, however, the crowd is making another, significant contribution, one that
Dr. Kevin Berg Kartaszewicz-Grell, crowdfunding research director at massolution (a Crowdsourcing.org sister company) refers to as the “engagement effect” in a recent report prepared for the American Institute of Architects (AIA).

AIA represents the interests over 85,000 member architects across the U.S., a sector that has been hit particularly hard by the recent financial crisis. The organization recently engaged massolution to examine crowdfunding’s potential as a new source of capital for residential, commercial, and industrial infrastructure projects.

Grell defines the “engagement effect” (which he also calls the “buy-in” concept) as “all the emerging benefits of crowdfunding other than direct crowdfunded capital and exposure.”

In addition to the obvious benefits of raising capital via crowdfunding, the publicity that successful campaigns receive makes it more likely that a product will succeed. Often, the exposure extends beyond the publicity that could be orchestrated through a costly public relations outreach. Indeed, the PR that comes with a popular crowdfunding campaign can expose the product to a much wider audience.

Social media is key here. More people are connected to family, friends, and strangers through social networks, which means more people have a chance at seeing a product. Decades ago, two sociologists, Paul Lazarsfeld and Elihu Katz, developed the two-step theory of communication. They argued that opinions were formed through a two-step process: a message passed from mass media to opinion leaders, and then from opinion leaders to the public at large. While this theory’s been debated in subsequent years, research shows that individuals do take friends’ and family members’ suggestions seriously.

Social media’s impact on crowdfunding is sizable. It helps identify early adopters, who are more likely to be emotionally (not to mention, financially) invested in a project. If they feel strongly enough about it, they can become brand ambassadors for your product. In short, the more they tweet, share, and upvote your product, the higher the chance of others seeing it and doing the same.

The “engagement effect”

Beyond direct crowdfunded capital and exposure, the “engagement effect” includes all additional emerging benefits of crowdfunding.

The ability to market test the demand for new products by pre-selling the product by raising funds in exchange for pre-orders is significant. Market demand signals derived through crowdfunding are likely to produce significantly better insights into the true market demand of a new product. Crowdfunding promises to make the guesswork around how much of a product to manufacture clearer and could prove to be a more reliable model than traditional market testing methods such as focus groups and surveys.

Additionally, for entrepreneurs who have successfully raised capital via crowdfunding, achieving a market-based proof of concept is likely to draw investors' interest in subsequent funding rounds.

Crowdfunders can amplify the additional value-add benefits of crowdfunding beyond capital contribution. The uBiome and American Gut campaigns on Indiegogo, which Crowdsourcing.org featured in-depth here (the editors also invited the uBiome folks onto the Crowded Room podcast, give it a listen here), illustrate this well.

Both campaign teams, who wish to sequence and better understand the microbiome, asked the crowd to raise awareness of their projects in addition to contributing funds. Underpinning the success of the initiative, however, was the need to recruit test subjects. Instead of sourcing them from a different group of individuals, the campaign teams asked backers themselves to provide samples of their microbiome. This created a unique relationship between the backers and the campaign they funded. So far, uBiome has raised $270,000 from 2,000 backers/subjects, while American Gut finished its campaign with $340,000.

In the AIA report, Grell identifies two other examples, ones more closely tied to funding. If enough people back a construction project, for instance, it can be easier to secure a matching grant from the local government. That was the case with the Oatmeal’s campaign to build a museum for famed scientist Nikola Tesla. In an area where buildings are limited to a certain height, the local community’s support for a taller structure can influence the zoning committee to make an exception and let the construction commence.

Some individuals are thinking beyond this current model and are actually taking advantage of the crowd being in “one place” to crowdsource tasks that could help the product in ways other than capital or exposure. Ryan Wallis of Hybrid Funding, a white label crowdfunding provider, for example, offers features that let people earn perks in ways other than cash. A user interested in getting an advance copy of a video game, for instance, could offer up several hours’ worth of time to test for bugs. Or, a writer could ask the crowd to read through a manuscript to seek out any pesky typos or grammatical errors – in return for 10 pages of copy-editing, the workers get an advance copy of the book.

Outlook

Large companies, campaign managers and platform operators are beginning to realize that the crowd delivers more than just cash and exposure. Additional benefits of crowdfunding as a model for engagement and for testing market demand looks ready to drive the evolution of the model to the next stage in its development.

To learn more about crowdsourcing and crowdfunding business models, check out our research section, which features more reports by massolution.

About massolution

Massolution is a unique research and advisory firm specializing in the crowdsourcing and crowdfunding industries. Massolution works with governments, institutions and enterprises in the design and implementation of crowdsourcing and crowdfunding business models that drive improved business performance, product and service innovation, enhanced levels of customer engagement and in the formation of new sources of capital.

Massolution also operates the industry website Crowdsourcing.org.

You can reach a representative at massolution by emailing contact@crowdsourcing.org.

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  • Guest Howard J. Leonhardt Feb 08, 2013 02:21 am GMT

    Before the crowdfunding act was passed with overwhelming bi-partisan support 407 to 17 – the true will of the people, entrepreneurs were restricted to only offering their stock to millionaires where they had a substantial pre-existing relationship. This excluded most ordinary folks from the process. It especially excluded minorities, youth and even women that were not part of the golf country club “good ole boys” millionaires club. In the old system women landed less than 5% of available financing, minorities under 1%, youth 1% and children of blue collar families about the same.

    The number of accredited angel investors decreased by 12.5% last year to about 120,000. Of this group far less than half have any interest in investing in any startups started by people they do not know. Thus the 40,000 or so accredited investors willing to look at an opportunity started by someone they do not know is highly over shopped. We need to open up to a wider circle of investors to re-invigorate the economy.

    Crowdfunding is human will expressed in pure form. A person with a vision becomes a dream funded on a mission. It is the explosive combination of democracy and free market capitalism. It’s democracy and capitalism in action: think you have a great idea? Convince enough people and you can make it a reality. If not, back to the drawing board. It allows new ideas to get funded and to be free market tested at a lower cost, with less complexity, in less time than ever before. Experimentation has now become possible for millions that were previously excluded from having any chance for their idea to be tried. I am confident that this simple breakthrough socio-economic tool is about to herald in mankind’s greatest era. Howard J. Leonhardt

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