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The Future of Crowdfunding
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editorial

The Future of Crowdfunding

Editor's Note: The following article comes to us from Alex Sheshunoff, founder of Foodstart, a crowdfunding platform for the food and beverage industries. Sheshunoff explains why he believes the future of crowdfunding is vertical, not horizontal. Follow his platform on Twitter @FoodstartNOW.

According to Crowdsourcing.org, there are currently 548 crowdfunding platforms in development. The majority of these are general sites - in other words, they seek to serve vast markets such “startup companies” or “small business in America” or even “new enterprises globally.”

A few of these portals will be successful, but the majority will fail. Because in the end, serving “small and medium sized business” isn’t a target market; it’s a wistful aspiration.

The customer will drive the segmentation of the industry. People who back a new 3D printing concept just have too little in common with those who invest in a new food truck. Compared to a more focused approach, general portals – whether reward or equity based – simply leave the customer underserved.

To take one example I happen to know well: my own company, Foodstart, which focuses solely on food and beverage. We’ve found that once you have your vertical identified, almost everything else falls into place. One example is reward redemption. Because we serve only physical entities, we can offer backers an embossed card or a smartphone application that they can present at the establishment to redeem perks.

Focus also allows us to offer reward suggestions, white papers, market research, and content related to the field, as well introductions to restaurant consultants, attorneys and accountants with expertise in the field, small business administration (SBA) lenders, location specialists, and so on. But all of this is impossible if you are trying to serve producers of urban farms, gadgets, and documentaries.

Social factors will also drive vertical specialization. It’s not the platform or the back-end technology that brings people to crowdfunding sites  the platforms are all pretty similar and the technology isn’t especially compelling or difficult to create. Instead, what draws people to a site is the community of people who share the same interests.

Our research supports this. We conducted a survey of 1,008 Americans and asked them to describe the potential motivation behind making a small investment in a small business. Turns out, they want to feel they are a part of something new and cool. Which makes sense – an 8 percent return on $200 is only $16. But a guaranteed table at a busy new restaurant? That’s something with a real social return, especially among a group as tribal as foodies. (This dynamic partly explains why the first vertical we’re focusing on is restaurants and bars - few people want to brag to their friends that they own part of a local dentist practice. And not many people are excited about the free perks that might come along with the ownership of one!)

I don’t anticipate a sudden change. Instead, expect to see crowd funders gradually gravitate towards communities of common interest, whether that’s food and beverage, gaming, or film production. On the internet, it’s almost always been thus.

Recall the late 1990’s when general portals like AOL, MSN, and Yahoo! seemed all but invincible. But as more and more people came online, these new users increasingly looked to find others with specialized interests. The numbers back this up. In 2000, the top ten sites accounted for 29.3 percent of time spent online. By 2012 the top ten sites accounted for only 17 percent. Take out Facebook and that number drops to just 10 percent.

A lot of factors were at work, but that shift had an enormous effect on shareholder value for those early leaders. AOL is the most striking example. In 2000, Time Warner bought AOL for $164 billion…eight years later they spun it off for $2 billion.

Not all suffered so dramatically. Amazon was big in 2000 and still is today. Since its peak at the turn of the millennium, Yahoo’s market capitalization has declined by 82 percent, but Yahoo! is still the fourth most visited site on the internet.

Yet almost all of these early leaders have been forced either to give up market share or acquire vertically focused companies. For Amazon, those acquisitions included diapers.com, zappos.com and vine.com. For AOL, it was TechCrunch, The Huffington Post, Moviefone and others. For Yahoo!, Hotjobs and Rivals.com, among others.

These sub-brands thrive not because the acquiring companies want to maintain lots of parallel storefronts, but because their customers increasingly demand to be among those who share their interests. I, at least, don’t expect crowd funding to be any different.

Alex Sheshunoff is the founder of Foodstart.com – a crowdfunding portal focused on the food-and-beverage industry. He can be reached at alexs@foodstart.com.

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  • marianne doczi marianne doczi Jan 09, 2013 11:04 pm GMT

    Perhaps it should be renamed "tribefunding" as people seek the either virtual or actual experience of 'belonging'. Of being part of a group or scene that resonates with their values and identity or aspirations for such.

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